Key Takeaways
- • Family offices seeking tax deductions for operating costs must generally qualify as a trade or business under IRC Section 162, since the 2017 Tax Cuts and Jobs Act suspended miscellaneous itemized deductions for 2018-2025 and the One Big Beautiful Bill Act of 2025 made that suspension permanent.
- • Offices with aggregate expenses under $1 million often may not justify forming or restructuring, according to the Brown Advisory framework outlined in a publisher article.
- • Trade-or-business status can trigger SEC registration as an investment adviser, so families must weigh the IRS and SEC outcomes together, including the Family Office Rule exclusion under 17 C.F.R. 275.202(a)(11)(G)-1.
- • The Lender Management LLC v. Commissioner decision, which upheld full deductibility, is a practical blueprint, while the Hellmann (GF Family Management LLC) matter settled without a merits opinion.
- • Restructuring can create family tension over profits-interest compensation and changes in how members interact with the office.
Summary
Family offices are reassessing whether their operating costs can be treated as trade-or-business expenses rather than miscellaneous itemized deductions. Per the publisher material, the 2017 Tax Cuts and Jobs Act suspended those deductions for tax years 2018 through 2025, and the One Big Beautiful Bill Act of 2025 made the suspension permanent. Families that do not operate as a bona fide trade or business under Section 162 have effectively lost the ability to deduct costs that can reach into the millions annually.
Court decisions have clarified what qualifies as a genuine business. The Lender Management LLC v. Commissioner ruling, which upheld full deductibility, is described as a practical blueprint, though it reflects the view of one Tax Court judge. The Hellmann (GF Family Management LLC) matter settled without a merits opinion and illustrates the IRS's scrutiny when a family office resembles self-management rather than an independent advisory enterprise.
Restructuring carries regulatory consequences. A family office operating as a business may need to register with the SEC as a registered investment adviser under the Advisers Act unless it fits the SEC Family Office Rule, which requires that it have no non-family clients, be wholly owned and controlled by family, and not hold itself out to the public as an adviser. The publisher advises a three-step review: quantifying current expenses and state tax effects, assessing whether the family's structure, such as multiple branches and generations, supports a Lender-like model, and evaluating whether family members are willing to accept the changes. For families with expenses over $1 million and multiple branches, an initial review with advisors is recommended.
The source material notes that this area of law remains relatively new and that the risk of an adverse outcome, including litigation costs, is meaningful. Note that the full CNBC article could not be retrieved, so this summary relies on the publisher and web-search material.
Court decisions have clarified what qualifies as a genuine business. The Lender Management LLC v. Commissioner ruling, which upheld full deductibility, is described as a practical blueprint, though it reflects the view of one Tax Court judge. The Hellmann (GF Family Management LLC) matter settled without a merits opinion and illustrates the IRS's scrutiny when a family office resembles self-management rather than an independent advisory enterprise.
Restructuring carries regulatory consequences. A family office operating as a business may need to register with the SEC as a registered investment adviser under the Advisers Act unless it fits the SEC Family Office Rule, which requires that it have no non-family clients, be wholly owned and controlled by family, and not hold itself out to the public as an adviser. The publisher advises a three-step review: quantifying current expenses and state tax effects, assessing whether the family's structure, such as multiple branches and generations, supports a Lender-like model, and evaluating whether family members are willing to accept the changes. For families with expenses over $1 million and multiple branches, an initial review with advisors is recommended.
The source material notes that this area of law remains relatively new and that the risk of an adverse outcome, including litigation costs, is meaningful. Note that the full CNBC article could not be retrieved, so this summary relies on the publisher and web-search material.
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