What Are Related Party Transactions? Tax Rules and SEC Disclosure

Related party transactions are transfers of resources, services, or obligations between a company and someone already connected to it through ownership, management, or family ties. The deals aren’t inherently improper, but the built-in conflict of interest attracts regulators: the SEC requires public companies to disclose them once they exceed $120,000, and the IRS applies separate rules that can disallow losses, reclassify income, or trigger penalties when the pricing doesn’t reflect fair market value.¹

The concept is broader than most people expect. Money doesn’t have to change hands. If a company lets its CEO use a corporate jet for personal travel, that counts. If a parent absorbs a subsidiary’s overhead without billing for it, that counts too. The defining feature is a transfer of economic value between parties that already have a relationship giving one side influence over the other. These deals matter to regulators because they don’t happen in a competitive market. When two strangers negotiate, each side pushes for the best price. When a company sells property to its founder’s family trust, that pressure disappears.

Who Counts as a Related Party

The SEC and IRS define the term differently depending on the context, and the distinction matters because the consequences of each are separate.

SEC Definition for Public Company Disclosure

Under Regulation S-K Item 404, a “related person” includes any director, executive officer, or nominee for director, along with any beneficial owner of more than 5% of the company’s voting securities. Immediate family is defined broadly and covers spouses, children, stepchildren, parents, stepparents, siblings, in-laws, and anyone sharing the household of a director or officer other than a tenant or employee.¹

IRS Definition for Tax Purposes

The IRS uses a different list under IRC Section 267. Related parties include an individual and any corporation where that person owns more than 50% of the stock, two corporations in the same controlled group, a trust and its grantors or beneficiaries, and an S corporation paired with another S or C corporation when the same people own more than 50% of each. Family members under Section 267 include siblings (whole or half blood), spouses, ancestors, and lineal descendants. In-laws, aunts, uncles, and cousins are not on that list.²

Parent companies and their subsidiaries are automatically related under both frameworks, as are affiliates under common control. The ownership threshold that triggers related-party status varies by provision: 50% for most IRS rules, 5% for SEC disclosure.

Common Examples

These deals take many forms, but a few patterns appear constantly in corporate filings and tax audits.

Inventory and supply sales, such as a parent selling raw materials to its subsidiary or a subsidiary selling finished goods back to the parent for distribution. Transfer pricing disputes originate here.
Leasing arrangements, where a company leases office space or equipment from an entity owned by one of its directors. The question is always whether the rent reflects market rates.
Management fees and shared services, where a parent charges subsidiaries for centralized accounting, legal, or IT support. These can be legitimate cost-sharing or a mechanism for shifting profits between entities.
Loans between related parties, including a company lending money to an executive or affiliated entity at a below-market interest rate, or a shareholder guaranteeing the company’s third-party debt.
Asset transfers, where a company sells real estate, intellectual property, or equipment to an insider or affiliated entity at a price that raises questions about fairness.

The Arm’s Length Standard

The arm’s length standard is the benchmark regulators use to evaluate every related party transaction. A deal between related parties should produce the same price, terms, and conditions that two unrelated parties would negotiate independently. IRC Section 482 gives the IRS authority to reallocate income and deductions between commonly controlled businesses whenever a transaction falls short of this standard.³

In practice, proving arm’s length pricing means comparing the transaction to similar deals between unrelated parties in the open market. If a company sells a building to its director for $800,000 when comparable properties sell for $1.2 million, the gap speaks for itself. The IRS can recharacterize the deal, treat the discount as compensation or a distribution, and assess taxes on the difference. Companies with significant intercompany activity are expected to maintain transfer pricing documentation supporting their methodology, and the IRS may review contracts, invoices, functional analyses, financial statements, and formal transfer pricing studies during an audit.⁴

Tax Consequences

Loss Disallowance Under IRC 267

One of the most consequential rules is the flat prohibition on deducting losses from sales or exchanges between related parties. If you sell property at a loss to your sibling, your spouse, a corporation you control, or a trust where you’re a beneficiary, the IRS disallows the loss entirely.²

There is a partial silver lining. If the buyer later sells the property to an unrelated party at a gain, that gain is recognized only to the extent it exceeds the previously disallowed loss. But if the related buyer never sells at a gain, or sells at a further loss, the original deduction is gone for good. People get burned by this rule when they sell depreciated stock or real estate to family members without realizing the tax deduction vanishes.

Below-Market Loans and the Applicable Federal Rate

Loans between related parties get special attention. Under IRC Section 7872, loans exceeding $10,000 must charge at least the applicable federal rate (AFR) published monthly by the IRS. For March 2026, those rates are 3.59% for short-term loans (up to three years), 3.93% for mid-term loans (three to nine years), and 4.72% for long-term loans (over nine years).⁵

If a related party loan charges less than the AFR or no interest at all, the IRS treats the forgone interest as if it were actually paid. For a C corporation shareholder receiving a zero-interest loan, the agency can reclassify the arrangement as a constructive dividend, creating a taxable event where the borrower thought none existed. This trap catches business owners who treat their company as a personal bank account.

Transfer Pricing Penalties

When the IRS adjusts pricing between related parties under Section 482, accuracy-related penalties stack up quickly. A substantial valuation misstatement occurs when the claimed transfer price is 200% or more (or 50% or less) of the correct arm’s length price, or when the net transfer pricing adjustment exceeds the lesser of $5 million or 10% of gross receipts. The penalty is 20% of the resulting tax underpayment.⁶

A gross valuation misstatement doubles the penalty to 40%. That level applies when the transfer price is 400% or more (or 25% or less) of the correct price, or when the net adjustment exceeds $20 million or 20% of gross receipts.⁶ For multinationals running billions in intercompany transactions, these penalties can dwarf the underlying tax adjustment.

SEC Disclosure Requirements

Public companies report related party transactions under two overlapping frameworks: FASB ASC 850 for disclosures inside the financial statements, and Regulation S-K Item 404 for disclosures outside them, typically in proxy filings.

Inside the Financial Statements

ASC 850 requires companies to disclose material related party transactions in their financial statements. The required information covers the nature of the relationship, a description of each transaction (even those with zero dollar value), the dollar amounts for each period covered by an income statement, and amounts owed to or from related parties as of each balance sheet date.⁷

Outside the Financial Statements

Regulation S-K Item 404 requires a separate disclosure in registration statements and proxy filings for any transaction exceeding $120,000 in which a related person had a direct or indirect material interest. For smaller reporting companies, the threshold drops to the lesser of $120,000 or 1% of average total assets over the last two fiscal years.¹

Item 404 also requires companies to describe their policies and procedures for reviewing and approving related party transactions, including what types of transactions the policy covers, what standards the company applies, and who on the board is responsible for review. If any disclosed transaction was not reviewed under the company’s established procedures, the lapse must be specifically identified.¹

Board and Auditor Oversight

Stock exchange listing standards add another layer beyond SEC filing requirements. The NYSE requires that a company’s audit committee or another independent body of the board conduct a reasonable prior review of related party transactions for potential conflicts of interest. If the reviewing body determines a transaction is inconsistent with the interests of the company and its shareholders, the rule requires it to block the deal.⁸

External auditors act as a second gatekeeper. PCAOB Auditing Standard 2410 requires auditors to understand a company’s process for authorizing related party transactions and to ask management about any that bypassed established approval procedures or received exceptions to policy.⁹ When a related party transaction slips through without proper authorization, auditors are trained to treat it as a red flag for possible fraud.

Penalties for Noncompliance

SEC Enforcement

When related party disclosure failures involve intentional deception, criminal liability enters the picture. Under the Sarbanes-Oxley Act, a CEO or CFO who knowingly certifies a financial report that fails to comply with SEC requirements faces up to $1 million in fines and 10 years in prison. If the false certification was willful, the penalties rise to $5 million and up to 20 years.¹⁰

Foreign Related Party Reporting on Form 5472

Companies with foreign related parties face a separate reporting obligation. Any U.S. corporation, or foreign-owned U.S. disregarded entity, that has reportable transactions with a foreign or domestic related party must file Form 5472 with its income tax return. The penalty for failing to file is $25,000 per form, and filing a substantially incomplete form counts as a failure to file.¹¹

The penalties escalate if the problem is ignored. After the IRS sends a notification of failure, the company has 90 days to comply. If it doesn’t, an additional $25,000 penalty accrues for each 30-day period, or partial period, that the failure continues. Criminal penalties under Sections 7203, 7206, and 7207 of the tax code may also apply for filing false information or refusing to submit required records.¹¹ For multinational structures, Form 5472 is one of those quiet compliance obligations that generates outsized penalties when overlooked.

1
eCFR. 17 CFR 229.404 – Item 404 Transactions With Related Persons, Promoters and Certain Control Persons
2
Office of the Law Revision Counsel. 26 USC 267 – Losses, Expenses, and Interest With Respect to Transactions Between Related Taxpayers
3
eCFR. 26 CFR 1.482-1 – Allocation of Income and Deductions Among Taxpayers
4
Internal Revenue Service. Three Requirements of IRC 482
5
Internal Revenue Service. Rev. Rul. 2026-6 Applicable Federal Rates
6
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
7
Deloitte Accounting Research Tool (DART). 5.3 Related-Party Transactions
8
New York Stock Exchange LLC. Proposed Rule Change to Amend Sections 312.03, 312.04 and 314.00 of the NYSE Listed Company Manual
9
PCAOB Public Company Accounting Oversight Board. AS 2410: Related Parties
10
Office of the Law Revision Counsel. 18 USC 1350 – Failure of Corporate Officers to Certify Financial Reports
11
Internal Revenue Service. Instructions for Form 5472