Family office tax planning evaluates whether a family’s investment-management operation is a business, how it earns compensation, and which expenses each taxpayer can deduct. A management LLC can provide useful organization, but its name, asset size, or payroll does not establish a tax deduction. The services, ownership, economics, and records must support the treatment claimed.

Philip M. Falco, Attorney & CPA helps families coordinate entity structure, tax analysis, agreements, and reporting. This service is part of our LLC, Partnership & Corporate Taxation practice in Denver.

Schedule a $500 Tax Attorney Consultation to discuss an existing family office or a proposed structure. The fee includes up to one hour of attorney time for review, analysis, preparation, and the telephone consultation combined.

When Is a Family Office a Trade or Business?

A family office coordinates financial affairs for a family. It may oversee investments, accounting, cash needs, entities, trusts, and outside advisers. For federal income-tax purposes, however, those activities must be evaluated separately. Personal investment oversight, operating a rental business, administering a trust, and selling management services can have different tax consequences.

Section 162 permits ordinary and necessary expenses of carrying on a trade or business, subject to applicable limitations. Section 212 addresses certain income-production, investment-management, and tax-related expenses of individuals. Classifying an expenditure under Section 212 does not establish that it remains deductible on an individual’s return.

In Higgins v. Commissioner, 312 U.S. 212 (1941), extensive personal securities investments, offices, and employees did not make the taxpayer’s securities-management activities a business. The Court distinguished the taxpayer’s real-estate business and accepted allocation of shared expenses. Scale and administrative sophistication alone did not resolve the issue.

The planning question is whether the management operation actually provides services to others for compensation, with regular business activity and a profit purpose, rather than merely supervising its owners’ investments. An entity chart is a starting point; the working relationships and financial results must also be examined.

Investment Expenses Under Current Law: Section 67(h)

The 2025 legislation removed the scheduled end of the miscellaneous-itemized-deduction restriction. For tax years beginning after December 31, 2025, the amended provision is Section 67(h); older materials refer to Section 67(g). Current law does not restore ordinary miscellaneous itemized investment-advisory deductions in 2026.

This does not mean that every expense associated with investments, rentals, or trusts is disallowed. Section 67(b) identifies deductions outside that category, and other rules govern business expenses, capitalized costs, and qualifying estate or trust administration expenses. Identify the taxpayer, activity, and type of expense before deciding its treatment.

Section 67(c) also addresses indirect deductions through pass-through entities. Paying an investment bill through a family partnership does not, by itself, convert the owners’ investment expense into an operating-business deduction.

What Lender Management Establishes—and What It Does Not

In Lender Management, LLC v. Commissioner, T.C. Memo. 2017-246, the Tax Court held that the management company carried on a trade or business during the years at issue. The opinion examined an established operation with employees, investment research, negotiations, cash management, outside advisers, and services tailored to clients’ differing needs.

Most managed assets belonged to family investors who did not own the management company. Its compensation included profits interests received for services, separate from its return on invested capital. The court also considered clients’ ability to withdraw and the commercial substance of the relationships. Family connections required closer scrutiny, but did not automatically prevent business treatment.

The decision is a factual precedent, not an IRS-approved family-office template. It did not establish a minimum portfolio size or guarantee business status whenever relatives form separate LLCs. It addressed the management company’s deductions for 2010–2012; it did not make every fee paid by a family investor deductible under today’s law.

Separate the Management Business From the Assets It Serves

A proposed structure should identify three distinct roles:

Management company: provides defined services, engages staff or contractors, keeps its own books, and receives compensation under enforceable arrangements.
Investment and operating entities: own portfolios, properties, or businesses and retain the manager for specified work. Their tax classifications and activities must be identified separately.
Family members and trusts: hold ownership interests, receive investment returns, and have individual cash-flow, succession, and reporting needs.

The same person may participate in more than one role. Map direct and indirect ownership, decision-making authority, service obligations, and compensation before selecting the entity form. Federal tax classification matters: a disregarded LLC does not create a separate income-tax taxpayer simply because it has a separate bank account.

Agreements should describe the services, who receives them, how compensation is determined, allocation of shared expenses, termination rights, and access to records. Actual conduct should follow those agreements. Our business formation and operating-agreement services can be coordinated with the tax review.

Management Fees, Profits Interests, and Both Sides of the Transaction

The manager’s expense deduction and the client’s deduction for paying the manager are separate questions. A service business may have deductible operating costs while a family investor’s fee remains a nondeductible miscellaneous itemized expense. A complete model must include the manager’s income, its costs, the payer’s treatment, owner-level taxes, and ongoing administrative expense.

Fixed or Asset-Based Fees

Fees should reflect actual services and commercially supportable pricing. Document the scope, personnel, time, allocation method, invoices, and payment history. Related-party arrangements may require analysis under Section 482; related-party accruals may also raise timing issues under Section 267. A signed contract alone does not establish the amount, timing, or deductibility of a charge.

Profits Interests and Incentive Allocations

A profits interest is not interchangeable with a management-fee invoice. In Lender Management, contingent profits interests compensated the manager for services and were an important part of the facts. Designing an arrangement today requires separate analysis of the interest granted, capital versus profits rights, allocations under Section 704, service transactions and guaranteed payments under Section 707, and any applicable Section 1061 carried-interest rules.

Neither calling a payment an allocation nor tying it to profits guarantees favorable treatment. Model the result across all affected taxpayers and confirm that the agreements, economics, and reporting match.

A Simple Illustration of Why Both Sides Matter

Assume, solely for illustration, a qualifying management business earns $300,000 of service fees and incurs $240,000 of currently deductible business expenses. Its net service income before other adjustments is $60,000. That calculation does not establish a $300,000 deduction for the family investors paying the fees. Their treatment depends on their activities and the governing deduction rules. Comparing only the manager’s $240,000 expense figure with a family member’s tax rate would omit essential parts of the analysis.

Which Family Office Expenses Need Review?

For an operating management business, potentially deductible costs may include reasonable compensation for work performed, office rent, software, research, accounting, and professional services. Each expense still needs a business connection, substantiation, and review of any special limitation.

Employee and contractor costs: confirm real duties, reasonable amounts, worker classification, and the correct reporting treatment for owners.
Shared staff and facilities: allocate costs among management work, investment-owner expenses, operating businesses, and personal services using a supportable method.
Formation, startup, and acquisition costs: analyze Section 195, Section 263, and other applicable capitalization or organizational-cost rules before claiming a current deduction.
Travel and mixed-use costs: establish business purpose and satisfy the applicable records and deduction limitations.
Personal and household spending: family travel, personal bill-paying, and household services do not become deductible business expenses merely because the office pays them. Section 262 generally disallows personal, living, and family expenses.

Business status is only one step. Entity and owner-level limitations can still affect losses and deductions. Coordinate the analysis with partnership and Schedule K-1 reporting and high-net-worth tax preparation.

Employing Family Members and Reviewing Retirement Plans

Family members can perform useful work, but compensation should correspond to actual services at a reasonable rate. Maintain job descriptions, work records, payment records, and required tax reporting. Employment-tax exceptions depend on the relationship and entity form; an exception available to a parent’s sole proprietorship may not apply to a corporation. See the IRS guidance on family employees.

Retirement-plan planning depends on eligible compensation or earned income, the plan’s terms, contribution limits, employee coverage, and related-employer rules. Creating a management company does not automatically make investment income eligible for retirement contributions or permit other eligible employees to be excluded. Review IRS Publication 560 and the applicable controlled-group and affiliated-service-group rules with the plan administrator.

Ongoing payroll, financial reporting, and ownership changes can be addressed through year-round tax advisory. Where the engagement calls for broader financial oversight, review our CFO and board advisory services.

Coordinate Trusts, Estate Planning, and Foreign Investments

Family Partnerships and Trusts

A family limited partnership or family LLC may hold assets and support succession planning. That ownership function does not automatically create a management business. Coordinate management rights, transfers, distributions, and fiduciary obligations with the estate plan. Transfer-tax consequences and valuation questions need their own analysis.

Estates and non-grantor trusts have a specific rule for certain administration costs under Section 67(e). Ordinary investment-advisory charges do not all qualify simply because a trust pays them. Treasury Regulation §1.67-4 distinguishes costs commonly incurred by individuals, certain additional trust-related costs, and allocation of bundled fees. Determine grantor-trust status and the taxpayer treated as owning the assets before applying trust rules.

Foreign Holdings and Family Members Abroad

Centralized management can help organize records for foreign accounts, entities, funds, and trusts, but it does not replace each taxpayer’s reporting analysis. Coordinate international tax and foreign reporting with the ownership chart and investment calendar. Before adding a foreign company or restructuring a cross-border investment, review U.S. tax planning for foreign-company investments.

The SEC Family Office Rule Is a Separate Test

The federal investment-adviser family-office exclusion and Section 162 business status answer different questions. The SEC rule generally requires advice only to defined family clients, ownership by family clients, control by family members or family entities, and no public holding out as an investment adviser. Those defined terms and exceptions require careful review. See the SEC family-office compliance guide.

Qualifying for that exclusion does not establish an income-tax deduction. Conversely, accepting unrelated clients to support a business model can change the securities-law analysis. Coordinate federal and applicable state investment-adviser requirements before changing clients, ownership, or marketing.

Coordinate the Family Office With Transaction and Loss Planning

A management structure does not determine the tax treatment of every investment. Review QSBS planning for eligible company shares, DST 1031 exchanges for investment real estate, and rental losses and NOL carryforwards at the relevant owner or entity level.

If a family member proposes funding an operating company through retirement assets, ROBS business funding involves separate plan ownership and compliance requirements. Explore the five tax strategy guides to identify the analysis that fits the transaction.

What to Bring to a Family Office Tax Review

Ownership and entity chart: family members, trusts, investment entities, operating businesses, percentages, and tax classifications.
Existing agreements: management contracts, operating agreements, trust documents, compensation terms, and amendments.
Service evidence: staff roles, work records, research, investment decisions, client communications, and reports.
Financial records: recent returns, K-1s, ledgers, payroll, invoices, payments, and shared-expense allocations.
Economic projections: expected compensation, staffing, outside-adviser costs, administrative costs, and results for each taxpayer.
Upcoming decisions: new investments, liquidity events, ownership transfers, foreign holdings, hiring, or a change in manager.

Address the structure before contracts, compensation arrangements, and transactions become fixed. Follow-through matters: revisit the facts as ownership, personnel, services, and law change. A prior year’s treatment does not establish the result for every later year.

Family Office Tax Planning FAQs

How much wealth is required to form a deductible family office?

Section 162 does not provide a family-office asset threshold that guarantees business treatment. Size may affect whether staffing and professional costs are economically practical, but the activities, compensation, relationships, and profit purpose determine the tax analysis.

Does forming a management LLC make investment fees deductible?

No. The entity’s tax classification and actual activities matter. The management company’s operating expenses and the investor’s payment of management fees must be analyzed separately.

Can a family office serve only relatives and still be a business?

Potentially. Lender Management found business status on its particular facts despite family relationships. It does not establish that every family arrangement qualifies. Actual services, compensation, distinct client interests, and commercial conduct remain essential.

Are personal investment-advisory fees deductible again in 2026?

Generally, ordinary investment-advisory fees classified as miscellaneous itemized deductions remain disallowed. The 2025 legislation continued the restriction, now found in Section 67(h). Other expense categories and qualifying trust-administration costs require separate analysis.

Must a family office use a profits interest?

No single compensation method establishes business status. Profits interests mattered in Lender Management, but fees and incentive arrangements each require analysis of services, economics, ownership, and applicable tax rules.

Can a family office deduct all of a family’s administrative expenses?

No. Personal expenses, investor expenses, trust-administration costs, capital expenditures, and business operating costs may require different treatment. Shared charges should be allocated and documented.

Does the consultation include forming the family office?

The $500 consultation covers up to one hour of combined attorney review, analysis, preparation, and telephone consultation. Detailed structuring, tax modeling, agreements, return preparation, and ongoing advice require a separate engagement.

Discuss Your Family Office Structure With a Denver Tax Attorney & CPA

Philip Falco can help identify the relevant tax questions, evaluate the proposed management relationships, and coordinate the next steps with your existing advisers. Bring the ownership chart, current agreements, recent returns, and a description of the decision you want to make.

Schedule a $500 Tax Attorney Consultation or call (303) 626-7000. For broader transaction and annual planning needs, see Tax Strategy & Planning.

General federal tax information; the facts, tax year, entity classification, and applicable state and international rules determine the result. Authorities checked September 28, 2026.