One of the most overlooked areas of the tax code—yet frequently scrutinized during audits—is IRC §267, which governs related party transactions. These rules are designed to prevent taxpayers from taking advantage of timing differences or artificial losses through dealings with related parties.

Whether you're an individual taxpayer, a corporation, or a partner in a business, Section 267 can impact how and when deductions are allowed, and whether certain losses are disallowed entirely.

In this blog post, we'll cover:

What Is Section 267?

IRC §267 disallows or defers certain deductions and losses for transactions between related parties. The provision is in place to stop taxpayers from creating tax benefits without real economic loss—for example, by deducting expenses that haven’t been paid, or claiming losses from sales that don’t result in a true change in ownership.

Who Is Considered a Related Party Under §267?

The IRS has specific definitions for related parties under Section 267(b) and 267(e), which include:

Individuals and Family Members:

Entity Relationships:

The key threshold is typically more than 50% direct or indirect ownership.

How Section 267 Affects Tax Deductions and Losses

There are two primary ways §267 limits tax benefits:

1. Deferral of Accrued Expenses to Related Cash-Basis Taxpayers

If an accrual-basis taxpayer (like a C corp or partnership) accrues an expense to a related party who is on the cash basis, the deduction is not allowed until the related party includes the amount in income.

Example: Accrued Compensation

This prevents mismatched timing: a deduction in one year and income in a later year.

2. Disallowance of Losses on Sales to Related Parties

Section 267(a)(1) disallows losses on sales or exchanges of property between related parties.

Example: Asset Sale to a Related Party

This rule prevents taxpayers from generating capital losses by simply selling property to a relative or controlled entity while still retaining effective control.

Special Rules for Partnerships and S Corporations

Partnerships:

S Corporations:

Planning Considerations and Best Practices

1. Time Payments to Match Deductions

2. Avoid Artificial Loss Transactions

3. Document Ownership and Relationships

4. Consider S Corp vs. Partnership Structuring

Final Thoughts

Section 267 exists to preserve the integrity of the tax system by ensuring that related parties can't use accounting mismatches or artificial losses to reduce tax liabilities. While it can be complex, being aware of these rules is essential—especially for closely held businesses, family-run operations, and tax-savvy investors.

Understanding when and how §267 applies can help avoid disallowed deductions, timing mismatches, and audit issues. If you're working with related entities or family-owned businesses, a proactive approach to tax planning is key.