Post-Bankruptcy Tax Issues for Rebooted Businesses: NOLs, Equity Grants, and Section 382 Limits

Hook: Why post-bankruptcy taxes keep CFOs and founders up at night

Emerging from Chapter 11 is a fresh start — not a tax reset. Companies that reboot after bankruptcy still carry complicated tax histories: net operating losses (NOLs) that may be chopped or suspended, ownership-change rules under Section 382 that throttle future use of those NOLs, and compensation packages (cash and equity) designed to attract executives that create tax traps if mishandled. For small-cap and middle-market companies — and the advisers who counsel them — understanding these mechanics is critical to preserving value and avoiding surprise tax bills.

The 2026 landscape: what’s changed and what matters now

As of 2026, three trends shape post-bankruptcy tax planning:

• Higher IRS scrutiny and audit intensity on reorganizations and ownership changes (a continuation of heightened enforcement that intensified from 2022–2025).
• Greater reliance on equity compensation to conserve cash in reorganized companies — and more complexity around taxation of RSUs, options and performance awards.
• Valuation complexity from intangible-heavy business models and volatile assets (including digital assets), which directly affects Section 382 calculations and the value basis for NOL limitations.

High-profile reboots like Vice’s executive hires in late 2025 and early 2026 illustrate the operational reality: companies are rebuilding teams with senior hires paid significantly with equity and performance-based awards. That’s smart operationally, but it puts tax strategy front-and-center.

Core concept: How NOLs and Section 382 interact after bankruptcy

Net Operating Losses (NOLs) — quick refresher for practitioners

NOLs are tax attributes that reduce taxable income in future years. Under current federal law, NOLs generated in tax years beginning after 2017 are generally carried forward (indefinitely) but may only offset up to 80% of taxable income in a year. (COVID-era exceptions are expired.) State rules vary and many states treat NOLs differently; some limit carryforwards or phase-outs.

Bankruptcy interaction — cancellation of debt and attribute reduction

When debt is discharged in bankruptcy, the debtor may exclude cancellation of indebtedness (COD) income under IRC §108 if the debtor is in bankruptcy. But exclusion often triggers a mandatory reduction of tax attributes (including NOL carryforwards) under IRC §108(b). That means a large part of a company’s NOL pool can be reduced or eliminated as a direct tax consequence of reorganizing liabilities.

Actionable point: map COD exclusions and immediately compute attribute reduction under §108(b). That reduction is mechanical and irreversible — plan around it when negotiating creditor recoveries.

Section 382 — the choke point on using pre-change NOLs

When a corporation undergoes an “ownership change” (IRC §382), the use of pre-change NOLs is limited. The ownership-change test is technical, but the practical rule of thumb is straightforward: if the percentage of stock owned by one or more 5% shareholders increases by more than 50 percentage points over a three-year testing period, an ownership change has occurred.

The annual limitation after an ownership change is:

Section 382 limitation = (value of the loss corporation immediately before the ownership change) × (federal long-term tax-exempt rate)

The Treasury Department publishes the applicable long-term tax-exempt rate monthly. The result is an annual cap on the amount of pre-change NOLs that can offset taxable income. If your pre-change NOLs are large, Section 382 can stretch their utilization across many years — sometimes decades.

Simple example

Assume a reorganized company has $120 million of pre-change federal NOLs and a pre-change value of $200 million. If the Treasury long-term tax-exempt rate is 3%:

• Annual Section 382 limit = $200M × 3% = $6M
• At $6M per year, it will take ~20 years to use $120M, and remember the 80% taxable income limitation still applies in each year.

That example shows how a big NOL number can be largely illusory if Section 382 bites.

Practical steps at emergence: preserve what you can, model the rest

1. Get an immediate pre-change valuation

Why: The Section 382 annual limit depends on the value of the loss corporation just before the ownership change. The lower the pre-change value, the lower the annual limitation — and the slower you’ll use NOLs. Conversely, some strategies can increase the measured value in controlled ways to allow larger annual utilization.

Action items:

• Engage a valuation specialist experienced with distressed and post-bankruptcy companies — valuation teams that understand digital forensics and capital markets dynamics are especially helpful when intangible and volatile assets are present.
• Document assumptions — market multiples, discounted cash flows, and adjustments for control or lack of marketability — because those will be scrutinized by the IRS.

2. Map ownership changes and run an early Section 382 analysis

Action items:

• Identify “5-percent shareholders” and compute the three-year testing period ownership shifts.
• Model plausible reorganizations: stock issuance to creditors, conversions, and dilution from new equity grants. Each affects whether an ownership change has occurred and the size of the 382 limitation.
• If an ownership change is unavoidable, compute the 382 limitation under several valuation scenarios and test the impact on projected taxable income and tax cash flow for the next 5–10 years — use modern scenario and AI-driven modeling tools to accelerate scenario runs, but validate outputs with experts.

3. Track and preserve attribute pools in bankruptcy negotiation

Plan ad hoc in creditor negotiations to limit attribute-stripping outcomes:

• Where possible, preserve shareholder continuity using convertible instruments structured to avoid immediate changes in ownership percentages.
• Negotiate COD and settlement terms with tax attribute reductions factored into creditor recoveries — sometimes creditors will accept lower recovery in exchange for preserving corporate tax attributes that enhance long-term value.

Designing executive compensation post-bankruptcy: taxes and traps

To attract talent, reorganized firms often pay with a mix of cash, restricted stock units (RSUs), stock options, and performance equity. Each has distinct tax timing and deduction consequences for the company and the executive.

Common structures and tax mechanics

• Sign-on cash bonuses: Taxed as ordinary income to the executive when paid; deductible to the employer when paid (subject to reasonableness under IRC §162).
• RSUs: Executive recognizes ordinary income when RSUs vest (and employer gets deduction then). RSUs are often used because they are relatively simple to value and transfer.
• Nonqualified stock options (NQOs): Taxed to the executive at exercise as ordinary income equal to spread; employer deduction at exercise.
• Incentive stock options (ISOs): For private companies emerging from bankruptcy, ISOs are less common because the AMT and liquidity constraints make them awkward; ISOs carry special tax treatment and potential preference items.
• Performance-based equity: Awards tied to revenue, EBITDA or other metrics — taxation depends on whether the awards are structured as cash or stock and whether they meet statutory exceptions to deduction limits.

Deduction limits, excess parachutes, and deferred compensation

Several limits can blunt the company deduction for executive pay:

• IRC §162(m): The cap on deductions for covered employees can reduce or eliminate employer deductions for amounts payable to named executives if they exceed statutory limits and do not qualify for grandfathered or performance-based exceptions.
• IRC §280G (golden parachute rules): Large severance or change-in-control payments may be treated as excess parachute payments, causing nondeductibility and an excise tax for the executive. This is critical where reorganizations involve a change in control.
• IRC §409A: Deferred compensation must meet strict timing and distribution rules or face immediate income inclusion and penalties for executives; employers must design deferral arrangements with 409A compliance in mind.

Actionable tip: structure sign-on and retention awards to vest in tranches tied to performance and time, coordinate vesting with anticipated lifting of Section 382 or other milestones, and use restricted stock (not options) when you want a simpler tax outcome.

Advanced planning strategies for preserving or monetizing NOLs

1. Selling built-in gains / recognizing pre-change built-in gains

If the reorganized company has built-in gains (unrealized appreciated assets) at the time of the ownership change, recognizing those gains in the post-change period can increase the ability to offset income because certain recognized built-in gains can be sheltered by pre-change NOLs in limited circumstances. This is highly technical and requires coordination between valuation, timing, and tax accounting.

2. Using qualified stock or preferred stock carve-outs

In some restructurings, companies issue different classes of stock to creditors and management to preserve an identifiable continuity of ownership or to limit the ownership change magnitude. These structures must be carefully designed: the IRS looks through form to substance, and poorly documented carve-outs can trigger a full Section 382 analysis anyway.

3. Elective reorganizations and §381 carryovers

Certain tax-free reorganizations under the Internal Revenue Code allow the surviving or acquiring corporation to carry over tax attributes under §381. Where a bankruptcy reorganization can be structured to qualify as a tax-free reorganization, attribute carryovers may be preserved — but the conditions are narrow and must be signed off by tax counsel early in the plan negotiation.

4. State NOL planning

State rules differ dramatically. Some states do not conform to federal changes, have shorter carryforward periods, or apply separate ownership-change tests. For multistate companies, the state-level effect may be more constraining than federal Section 382 limits.

Operational checklist for the first 180 days after emergence

1. Run a Section 382 test immediately and re-run after any major equity issuance — instrument your processes and scenario runs with workflow observability best practices (observability for workflows).
2. Obtain a court-qualified pre-change valuation and retain documentation — work with valuation specialists who understand capital markets dynamics and forensics (capital markets & forensics).
3. Compute COD exclusions and §108(b) attribute reductions; disclose to stakeholders.
4. Map tax attribute pools (federal NOLs, state NOLs, credits) and create a utilization model for 5–20 years under varying revenue scenarios.
5. Design executive compensation with tax timing in mind: choose between RSUs, NQOs, cash bonuses or performance shares, and document business rationale and reasonableness for deductibility.
6. Consult tax counsel before issuing new equity to creditors or management to anticipate ownership-change consequences — collaborate with legal and document teams using docs-as-code approaches for workpapers and retention letters.
7. Coordinate with valuation advisors and auditors; keep contemporaneous workpapers and retention letters. Use modular templates for checklists and reporting to speed compliance review (templates-as-code).

Case study: a stylized “Vice-like” reboot (illustrative)

Imagine “StudioCo,” a media company that emerged from Chapter 11 in late 2025 and hired a new CFO and CEO in early 2026, paying each with a mix of cash and equity subject to vesting. StudioCo entered with $80M pre-change federal NOLs and a court-accepted pre-change value of $150M. Using a 4% long-term tax-exempt rate (a hypothetical 2026 rate):

• Annual Section 382 limit = $150M × 4% = $6M
• Real-world adjustments: RSUs granted to new executives will be deductible when vesting, increasing deductible payroll in the early years; however, those amounts do not increase the Section 382 limit on pre-change NOLs.
• If StudioCo can recognize some built-in gains in the five-year recognition period, it may use limited NOLs to offset that income sooner — but only if planned and executed properly.

Key takeaway: the business can still benefit from NOLs but must set expectations that tax sheltering of operating income will be slow unless value or rate assumptions change.

Special considerations for small business owners and the self-employed

Most owners of reorganized companies will be more focused on corporate tax attributes, but smaller pass-through entities (S corps, partnerships) emerging from financial distress have parallel concerns:

• Pass-through losses may be subject to basis, at-risk, and passive activity limitations.
• An ownership change in a partnership (or formation of a new partnership post-bankruptcy) can affect how and when suspended losses are used.
• Self-employed founders who receive new equity should plan for payroll tax withholding on vesting and for the timing of estimated tax payments.

Common missteps (and how to avoid them)

• Waiting to value the company: Don’t delay valuation — the pre-change valuation point is fixed and critical for Section 382 math.
• Ignoring state rules: Coordinate federal and state planning from day one.
• Designing compensation without tax counsel: Executive comp often has surprise nondeductible elements (409A, 280G, 162(m)); involve counsel and payroll early.
• Not documenting economic substance: The IRS will scrutinize whether carve-outs and “round-trip” transactions were genuine. Keep contemporaneous business rationales and board minutes.

Looking ahead: 2026–2028 trends to watch

• Increased focus on valuations in the digital asset era: Companies with crypto or token holdings will face extra scrutiny on pre-change valuations used for Section 382 — technical security and valuation practices for tokens and crypto are evolving (digital asset security).
• More creative equity instruments: Expect hybrid instruments blending performance rights, revenue-participation, and time-vested awards that aim to be tax-efficient and cash-preserving.
• AI-driven tax modeling: More teams will use scenario tools to model Section 382 outcomes and executive comp tax effects; but models need expert validation (perceptual AI and RAG techniques are being repurposed into financial scenario tooling).

When to call outside help (and who to call)

Bring in outside experts early:

• Tax counsel with experience in bankruptcy reorganizations and Section 382.
• Valuation specialist familiar with distressed-company and intangible-heavy valuations — look for firms that combine valuation and capital-markets forensics (capital markets & forensics).
• Compensation lawyer for §409A, §280G and §162(m) issues.
• State tax specialist if you operate in multiple jurisdictions.

Actionable takeaways — a quick checklist for CFOs and founders

1. Order a pre-change valuation within 30 days of plan confirmation.
2. Run a Section 382 test before any equity issuance or creditor-for-equity swap.
3. Compute COD exclusions and §108(b) attribute reductions immediately after debt discharge.
4. Design executive compensation with clear tax timing, 409A compliance and documentation of business purpose.
5. Model tax cash flows under multiple scenarios (best case/worst case) for the next 5–10 years considering the 382 limit and 80% taxable income cap — use scenario tooling and validate results with advisors; consider cloud-based modeling platforms and cost-efficient compute strategies (cloud cost references help size modeling costs).
6. Engage tax counsel, valuation experts and compensation specialists before finalizing creditor agreements or management incentive plans.

Final thoughts

Emerging from bankruptcy is an operational milestone — but the tax work starts immediately and affects long-term cash flows and executive incentives. Section 382 is often the single biggest limiter on the benefit of pre-change NOLs. Thoughtful valuation, prompt Section 382 analysis, careful compensation design and early specialist engagement can preserve real value and align incentives without creating unexpected tax losses.

Call-to-action

If your company is preparing to emerge from bankruptcy or you’re advising a post-reorganization business, don’t treat taxes as an afterthought. Download our Post-Bankruptcy Tax Checklist, or schedule a consultation with a valuation and tax specialist to run a tailored Section 382 and NOL utilization model. Protect the tax attributes that drive future recovery — act now. For reusable checklist templates and modular delivery patterns, see Modular Publishing Workflows, and for ready templates you can adapt, check the listing templates toolkit.

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