In business, working with family often feels natural. You trust each other, you move quickly, and deals get done without the red tape.
But when it comes to taxes, the IRS doesn’t see “family”—it sees related parties. And that distinction can quietly undo what looks like a perfectly good transaction.
Welcome to one of the most overlooked sections of the tax code: the rules that can make deductions disappear simply because of who you did business with.
The Deal That Looks Fine… Until It Isn’t
Let’s say you sell an asset at a loss to a relative or to a business you (or your family) control.
It feels legitimate. The price is fair. The paperwork checks out.
But here’s the problem: That loss you were counting on? You may not get to deduct it—at all.
The IRS essentially says: if the asset never really left your “economic family,” the loss doesn’t count.
No penalty. No warning. Just… gone.
It’s Not Just About Family
Most business owners assume these rules apply only to obvious relationships—like selling something to a sibling or child. But the reach goes much further.
You can be considered “related” if:
- You and your family collectively own more than 50% of a company
- You have ownership across multiple entities
- Trusts, partnerships, or corporations overlap in just the right (or wrong) way
In other words, even if you don’t own a majority interest directly, the IRS may still treat you as if you do.
The Hidden Ownership Trap
This is where things get tricky. The tax code uses what’s called constructive ownership—a concept that essentially says: “If your family or your entities own it… you might own it too.”
That means ownership can be:
- Shared across family members
- Passed through entities like partnerships or corporations
- Stacked in ways that push you over key thresholds without realizing it
So a transaction that looks like it’s between two separate parties on paper might, in the IRS’s eyes, be happening within the same circle. And that’s when the tax benefits start to disappear.
Timing Can Work Against You, Too
It’s not just losses that get affected.
If your business runs on accrual accounting and you owe money to a related party using cash accounting, you may not be able to deduct that expense right away.
Instead, the IRS forces a “wait until they report it” rule—delaying your deduction until the other party recognizes the income.
Translation: your tax timing strategy just got rewritten.
Why Business Owners Get Caught Off Guard
These rules don’t show up in obvious ways.
There’s no flashing warning sign when you:
- Transfer assets between entities
- Restructure ownership
- Make internal family business moves
Everything can look clean, intentional—even strategic. Until tax time.
The Real Takeaway
This isn’t about bad intent. It’s about relationships.
And in the eyes of the IRS, relationships can override what would otherwise be smart, well-structured business decisions.
That’s why planning before the transaction matters so much more than explaining it after the fact.
For assistance with your business planning, contact Saunders Tax & Accounting at http://www.saunderstax.com or call us at 301-714-2071. Open Monday – Thursday, 9 am to 5 pm. Awarded the Hagerstown Hot List 2026 and Hagerstown Chamber of Commerce “2023 Small Business of the Year” by providing a Less Taxing Life and More Prosperous Solutions since 1984!
