Technical question: modeling NOLs
Hi all! I'm trying to work through modeling an LBO but am stuck on modeling NOLs. Why is a change in an NOL modeled as the minimum of EBT, the beginning NOL balance, and the recognition % of equity price?
Any help/intuition as to why this is the case would be highly appreciated, I've been racking my brain for a day and still can't grasp it.
The IRS wants to prevent profitable companies from buying unprofitable companies solely for their unutilized NOLs as there are huge tax savings from utilizing those NOLs. Therefore if you've acquirored a company you can't deduct more than the Equity value * IRS long-term rate (around 1.8 - 2.0% currently I believe). This is the maximum amount of NOL you can utilize in a given year. Obviously if you have less EBT than your NOL balance or what the IRS says you can deduct then you're limited to that minimum of those amounts. Any unused amount can be carry forward for x amount of years (Don't know off the top of my head). There's also rules about built-in gains regarding the FMV of assets at acquistion, but that's likely too in the weeds.
Hope this helps.
Thank you!!!
https://multipleexpansion.com/2018/03/04/valuing-nols/
NOL carry fwd in model (Originally Posted: 12/04/2012)
how do you carry the nol across the IS/BS/CF in a model again..thx model gurus...
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