Taxes & Entities

SRLY Limits in a Consolidated Return

Understand the second cap on an acquired company's losses — the one that runs off that member's own cumulative contribution to group income, not off a value formula — and when the overlap rule makes it disappear.

  • Expert
  • 12 min total
  • 12 chapters

What decision this helps you make: Whether the losses a target brings into your consolidated group can be used against the group's income at all, and how to structure the acquisition so the SRLY register does not strand them.

What this topic is

A separate return limitation year, or SRLY, is a taxable year in which a corporation was not a member of the consolidated group that now owns it. Losses arising in those years — and, under the built-in loss rules, some losses recognised after joining — can be used on the consolidated return only up to that member's own cumulative contribution to consolidated taxable income, tracked from the day it joined. It is a second and entirely separate limitation from §382.

Why it matters

Buyers routinely price a target's NOLs against the §382 limitation and stop there. Inside a consolidated group there is a second gate. A $2.5M annual §382 limitation is irrelevant if the acquired member itself loses money for four years, because the SRLY register stays at zero and no amount of group income unlocks the losses. The two rules bind at different times and for different reasons, and the binding one is whichever is smaller. The overlap rule then switches SRLY off in the most common acquisition fact pattern — but only if the timing conditions are met, which is a structuring point.

Who should learn it

Tax directors of consolidated groups, M&A tax advisers, corporate development teams buying loss companies, and anyone modelling deferred tax assets acquired in a stock deal.

What you will understand

  • How the SRLY cumulative register works and why it is cumulative rather than annual
  • Why the SRLY subgroup rules can rescue losses that a member-by-member test would strand
  • How the overlap rule in the consolidated return regulations turns SRLY off when a §382 change coincides with the SRLY event
  • How SRLY interacts with built-in losses, capital losses, credits, and the 80% taxable income limitation

Prerequisites

Common misconception

"We ran the §382 study, so we know what the target's losses are worth." The §382 limitation tells you the annual ceiling. SRLY tells you whether there is anything to put under it. They are independent tests and both must be satisfied; the amount you can actually deduct is the lesser of the two constraints in any given year. A member with an ample §382 limitation and a negative cumulative SRLY register deducts nothing.