Related‑party rules
Section 267 prevents a corporation using the accrual method from deducting expenses owed to a related person who uses the cash method until the amount is actually paid and included in the recipient’s income. This rule blocks timing mismatches where one party deducts early while the other delays income.
Related‑party status is determined at the end of the tax year in which the deduction would otherwise occur. If the IRS disallows the deduction, the rule continues to apply even if the relationship ends later.
Who is related to a corporation
- Controlled group corporations
- Individuals owning >50% of the corporation
- Trust fiduciaries or grantors owning >50%
- S corporations with overlapping >50% ownership
- Partnerships with overlapping >50% ownership
- Employee‑owners of personal service corporations
Attribution rules
Ownership is attributed:
- Proportionately through entities (corporations, partnerships, estates, trusts)
- Through family members (spouse, siblings, ancestors, lineal descendants)
- Through partners
These rules also disallow losses on sales or exchanges between related persons.
Capital loss limitations
C corporations may deduct capital losses only against capital gains. They cannot use capital losses to offset ordinary income.
Unused capital losses follow strict carry rules:
- Carry back 3 years
- Carry forward 5 years
- Always treated as short‑term, regardless of original character
Losses expire if not used within the 5‑year carryforward window.
Carryback order
- 3 years back
- 2 years back
- 1 year back
- Forward 5 years
Capital losses cannot be combined with current‑year losses to create or increase an NOL.
Net operating losses (NOLs)
A corporation has an NOL when allowable business deductions exceed gross income. NOLs may be used to reduce taxable income in future years.
Current law (TCJA and later)
- NOLs arising in tax years after 2017 have no carryback (except farming and P&C insurance exceptions).
- They may be carried forward indefinitely.
- The NOL deduction is limited to 80% of taxable income.
Pre‑2018 NOLs
- Subject to 2‑year carryback and 20‑year carryforward rules.
- Not subject to the 80% limitation.
NOL calculation adjustments
When computing an NOL, the corporation must adjust taxable income by:
- Using the full dividends‑received deduction (not limited by taxable income)
- Using the full dividends‑paid deduction for certain utilities
- Excluding NOL carryovers
- Excluding capital loss carryovers
- Excluding charitable contribution carryovers
- Including casualty and theft losses
An NOL cannot increase because of carryovers from other years.
Quick refund procedures
A corporation may request a tentative refund from an NOL or capital loss carryback using Form 1139. The IRS must act within 45 days of filing.
Summary
These special rules govern how corporations handle related‑party transactions, capital losses, and NOLs. Key principles:
- Related‑party deductions are delayed until payment.
- Capital losses offset only capital gains and follow strict carry periods.
- NOLs offset future income but are limited to 80% for post‑2017 losses.
- Quick refunds are available through Form 1139.