Accrual-Method Corporations Must Delay Related-Party Deductions Under Section 267(a)(2)

(U.S.) — Accrual-method corporations must wait to deduct some unpaid expenses in 2026 when they owe the money to related parties who use the cash method, under Section 267(a)(2) of the U.S. tax code.

The rule blocks a common year-end tax move. A corporation may book salary, interest, rent or fees under the accrual method, but it generally cannot take the tax deduction until it pays a related cash-method person and that amount is includible in the payee’s gross income.

That timing rule reaches far beyond bookkeeping. It affects closely held corporations, family-owned businesses, founder-run companies, professional corporations, immigrant-owned U.S. corporations, and structures involving shareholders, partnerships, trusts, S corporations and other commonly controlled entities.

Section 267(a)(2) aims to stop a mismatch between accounting methods inside related-party groups. Without the rule, an accrual-method corporation could claim a current deduction while the related recipient, using the cash method, could delay recognizing income until a later year.

Publication 538 explains the same principle in simpler terms. An expense or interest owed to a related cash-method person is generally not deductible until payment is made and the corresponding amount is includible in that person’s gross income.

That makes the tax question different from the accounting question. Properly accruing an expense on the books does not settle the deduction if the payee is related and reports income only when money is received.

The rule matters most when corporations and their owners or related entities use different accounting methods. In those cases, year-end entries that look complete under the accrual method may still fail for tax purposes until cash changes hands.

For corporations, the related-party definition is broader than many taxpayers expect. Section 267(b) covers another corporation in the same controlled group, an individual who owns, directly or indirectly, more than 50% in value of the corporation’s outstanding stock, certain trust relationships, an S corporation where the same persons own more than 50% in value of each corporation, and a partnership where the same persons own more than 50% in value of the corporation and more than 50% of the capital or profits interest in the partnership.

Section 267(c) expands that analysis further through attribution rules. Stock owned by a corporation, partnership, estate, or trust can be attributed proportionately to shareholders, partners, or beneficiaries, and family attribution also applies.

The family definition is narrower than some taxpayers assume, but still broad enough to matter in many private companies. It includes only brothers and sisters, spouse, ancestors, and lineal descendants, and partner attribution also applies in certain cases.

That means direct ownership is not the whole story. A payee who holds no shares in his or her own name may still count as related through family ties or through entity ownership.

The result shows up often in ordinary year-end planning. A classic case involves a corporation that accrues a year-end bonus to a majority shareholder-employee but does not actually pay it before year-end.

On the books, the corporation may record the liability and treat the compensation as incurred. For tax purposes, though, the deduction is generally deferred until payment if the shareholder is a cash-method taxpayer.

The same issue can arise with interest on shareholder loans. It also can apply to rent paid to a related owner, management fees payable to a related entity, consulting charges owed to a related partnership, or financing costs owed inside an owner-controlled structure.

Smaller corporations face this problem often because owners sometimes try to fine-tune taxable income near year-end by accruing amounts without moving cash. Section 267(a)(2) blocks that result when the payment runs to a related cash-method person.

The rule is not limited to salary. It applies to business expenses and interest, so changing the label on the payable does not change the analysis.

Rent, consulting fees, management fees and financing costs can all fall within the same framework. If the expense is otherwise deductible, the payee is related, and the payee uses the cash method, the corporation may still have to wait until payment.

That is why the issue surfaces in examinations involving shareholder loans, intercompany service arrangements and owner-controlled real estate structures. A corporation may believe it has separated its operations from the building owner or management company, but the related-party test can still pull those arrangements back into Section 267.

Timing adds another layer. Publication 538 explains that the relationship is determined as of the end of the tax year for which the expense or interest would otherwise be deductible.

That year-end test matters because some taxpayers assume they can avoid the rule if the relationship later ends before payment. IRS guidance indicates the denial continues to matter even if the related-party relationship ends before the income is actually included.

In practice, that means a corporation cannot repair the problem simply by unwinding the relationship after year-end. If the parties were related at the end of the year in which the deduction would have been claimed, the delayed-deduction rule can still control.

Section 267 reaches beyond unpaid accruals as well. It also generally disallows losses on sales or exchanges of property between related persons.

That loss rule is separate from the accrual method versus cash method timing issue, but it sits inside the same related-party regime. A shareholder, related corporation or related partnership that sells property to the corporation at a loss generally cannot deduct that loss at that point.

For family businesses and controlled-group structures, that can change the economics of internal transfers. An asset sale that appears efficient inside a business group may produce a tax result very different from what the parties expected.

Closely held corporations feel these pressures most directly. Public corporations may encounter the rules less often in ordinary year-end work, but private companies tend to generate the exact fact patterns Section 267 was written to police.

Owner compensation creates one set of issues. Shareholder loans create another, and related real estate, family partnerships, trusts, management companies and controlled-group arrangements add more.

Personal service corporations and founder-led businesses face even more exposure because ownership and operational control often overlap. The same people who decide when to accrue an amount may also control the entity that will receive the payment.

That overlap makes Section 267(a)(2) a filing issue, not an academic one. A deduction that appears routine in a closely held corporation can turn into a tax adjustment if the payee uses the cash method and the payment did not occur in time.

Before taking a deduction for a year-end payable, corporations using the accrual method need to work through several questions. They must identify who owns the stock directly and indirectly, then apply the attribution rules to see whether the payee is related under Section 267.

They also need to determine the payee’s accounting method. If the recipient also uses the accrual method, the timing concern addressed by Section 267(a)(2) may not apply in the same way, but if the recipient uses the cash method, the deduction may need to wait.

The corporation must then confirm that the item falls within the statute. Section 267(a)(2) covers expenses and interest, which means the analysis can reach compensation, rent, fees and financing charges if the other conditions are met.

Payment timing remains the final check. A corporation has to verify whether payment was actually made in time for the amount to be included in the payee’s gross income.

If not, the tax deduction may be deferred even though the company recorded the amount in the proper year under the accrual method. That difference between book treatment and tax treatment is where many year-end mistakes begin.

For 2026, the bottom line remains direct. An accrual-method corporation generally cannot deduct business expenses or interest owed to a related cash-method person until payment is made and the amount is includible in the payee’s income.

The breadth of the related-party definition makes the rule harder to avoid than many owners expect. Controlled-group rules and attribution through family and entities mean the issue can arise even when the payee does not appear to hold a direct stake.

That is why year-end accruals to related persons require more than a standard accounting entry. On the books, the expense may look deductible; for tax purposes under Section 267(a)(2), it may still have to wait for cash.