Let’s revisit our tax schedule to consider the effect of net operating losses (“NOLs”). We have broken down NOLs into two categories–pre-transaction and post-transaction–to make our calculations more understandable. Treatment of NOLs that existed prior to the transaction depends on whether the deal is structured as an asset or a stock purchase. Recall that under IRC Section 382, NOLs carry over in transactions for which there is no step-up for tax purposes (e.g. regular stock deals), but are limited in use. The annual limitation equals the Federal long-term tax-exempt rate multiplied by the equity purchase price. Therefore, the value of the NOL is written down, if necessary, to an amount equal to the annual Section 382 limitation multiplied by the remaining lifetime of the NOL. Conversely, NOLs do not carry over in asset deals (or stock deals with Section 338 elections), and are not available to offset post-transaction income. In these cases, the NOLs are written off entirely but may be used to offset the gain on the acquisition. In all cases, any write-downs/offs of pre-transaction NOLs must be reflected in the purchase price allocation, as seen in our model below (scroll up to view).