The One Big Beautiful Bill Act quietly made a tax problem permanent for family offices, and the fix runs through a 2017 Tax Court case. By making the suspension of miscellaneous itemized deductions permanent, OBBBA eliminated the escape hatch family offices had been waiting to reopen at the end of 2025. A single-family office that runs millions of dollars a year in salaries, rent, and technology now has only one way to deduct those costs: qualify as a genuine trade or business under Section 162, the structure the Tax Court blessed in Lender Management, LLC v. Commissioner. Offices that stay mere investment vehicles lose the deduction for good, and at the top federal rate the cost of getting it wrong runs past $1 million a year.
Key Takeaways
- OBBBA made permanent the suspension of miscellaneous itemized deductions that began under the 2017 tax law, so a family office treated as an investment activity can no longer deduct its operating expenses, ever.
- The only remaining path to deductibility is to qualify as a trade or business under Section 162, the test the Tax Court applied in Lender Management, LLC v. Commissioner (T.C. Memo 2017-246).
- A family office running $4 million a year in expenses that fails the test loses roughly $1.48 million a year in deductions at a 37% rate, a permanent annual cost rather than a one-time hit.
- The deciding factor in Lender was separation of ownership: the management company managed money owned by family members who did not own the management company, and was paid through a profits interest tied to performance.
- The profits-interest and co-investment pay structures family offices are already adopting to retain talent are the same mechanism that helps establish Section 162 status.
What did OBBBA actually change for family offices?
The 2017 Tax Cuts and Jobs Act suspended miscellaneous itemized deductions under Section 212 from 2018 through 2025. That mattered to family offices because the costs of managing a family’s investments, the chief investment officer’s salary, the analysts, the office lease, the reporting software, had historically been Section 212 expenses. With Section 212 switched off, those costs became non-deductible unless the office could claim them somewhere else.
Many offices treated the suspension as a temporary annoyance. The provision carried a sunset at the end of 2025, so a family could absorb a few years of lost deductions and wait for the rules to revert. OBBBA closed that door. Morgan Lewis, writing on 2026 tax trends for family offices, notes that the act made the suspension permanent, removing the deduction for costs that often reach into the millions each year unless the office operates as a bona fide trade or business under Section 162.
The reframing matters. The question is no longer whether to wait out a temporary rule. It is whether to restructure now, because the deduction the family office is missing is never coming back on its own.
How does the Section 162 test decide it?
Section 162 lets a taxpayer deduct the ordinary and necessary expenses of carrying on a trade or business, and it was never suspended. The hard part is that managing your own investments, however actively, is not a trade or business. The Supreme Court settled that in Higgins v. Commissioner decades ago. Watching markets, meeting managers, and rebalancing a portfolio you own is investment activity, not a business, no matter how much labor it absorbs.
Lender Management, LLC v. Commissioner, decided December 13, 2017, drew the line family offices now live on. The Tax Court held that Lender Management was carrying on a trade or business because it was providing investment management services to its clients rather than to itself. Most of the assets it managed were owned by members of the Lender family who held no interest in the management company. The office was paid through a profits interest in each investment entity, compensation tied to the performance of money that belonged to other people. That combination, services to others plus performance-based pay plus regular and continuous activity, cleared the Groetzinger standard for a trade or business.
The factors that carried the day are specific and worth stating plainly. The management company managed money owned by people who did not own the management company. It charged a fee structured as a profits interest, not a simple cost reimbursement. It ran real infrastructure with employees and offices. And it served multiple family entities, not a single account. Strip out the ownership separation and the structure collapses back into Higgins: a principal who owns both the capital and the management company is still just managing his own money.
In practice, the profits interest is the lever most families get wrong. The fee the management company charges has to look like what an unrelated investment manager would actually negotiate, often a base management fee plus a performance or carried interest in the gains of each investment entity. A nominal fee that merely passes through the office’s costs reads as reimbursement, not as a business earning a profit, and that undercuts the Groetzinger profit motive the court weighed. The cleanest structures also concentrate the family capital in a small number of pooled investment LLCs, then have the management company contract to serve those LLCs, which sharpens the line between the office that provides services and the entities that own the money.
What is the cost of getting it wrong?
Put numbers on it. Consider a single-family office with $4 million in annual operating expenses, a realistic figure for an office with a chief investment officer, a small investment team, compliance staff, leased space, and an institutional technology stack. If that office is structured as an investment activity, OBBBA now makes the entire $4 million permanently non-deductible. At a 37% top federal rate, that is roughly $1.48 million in lost deductions every year. State income tax, where it applies, widens the gap further.
Structured instead as a Section 162 trade or business along Lender lines, where a management entity charges the family’s investment vehicles a fee and holds a profits interest, the same $4 million becomes deductible against the management company’s income. The annual saving is that same $1.48 million, and it recurs. Over a decade, the difference between the two structures on this single office approaches $15 million, before any state benefit. The restructuring cost, legal and administrative, is a rounding error against that number.
This is the proprietary point an advisor should carry into the conversation. The OBBBA permanence converts a tax structuring choice from a one-time decision into a compounding annual liability. Each year the office stays misstructured, it writes a seven-figure check it did not have to write, and unlike the pre-OBBBA world, there is no future sunset that bails it out.
Why does the talent trend make this easier in 2026?
Here is where two family office trends meet. Family offices are competing directly with private equity and hedge funds for investment talent, and the pay structures have shifted accordingly. According to compensation data compiled for 2026, long-term incentive plans and co-investment rights are now standard at offices managing $500 million or more, with median total compensation, including bonus and carried interest, running between $500,000 and $650,000. Demand for family office talent is growing 12% to 15% a year.
The mechanism offices are adopting to retain that talent, a profits or carried interest in the family’s investment entities, is the same mechanism that helped Lender Management establish itself as a trade or business. An office that pays its investment team through a performance-linked profits interest, rather than a flat salary funded by the principal, strengthens the case that the management company is in the business of providing services for performance-based compensation. The retention tool and the deduction structure point the same direction.
That alignment does not make the result automatic. The Tax Court was clear that this is a facts-and-circumstances inquiry, and commentators have cautioned that Lender Management presented unusually favorable facts. An office with weak ownership separation, no real staff, or compensation that looks like a disguised reimbursement rather than a genuine profits interest can still fail. The structure has to be real, documented, and operated as a business, not papered on after the fact.
What should a family office do before year end?
Three questions belong on the table now, with tax counsel in the room. First, is the management company genuinely managing assets owned by family members who do not own that company, or has the structure quietly become the principal managing his own capital, which fails under Higgins? Second, is the office compensated through a real profits interest tied to performance, with the infrastructure and continuity of an operating business, or through a flat fee that looks like cost reimbursement? Third, given OBBBA’s permanence, what is the annual deduction the current structure is forfeiting, and does that recurring number justify a restructuring this year rather than next?
The estate side of the house already moved on OBBBA’s permanent $15 million exemption, and many offices are mid-stream on governance and succession gaps that the same legislation reopened. The operating-expense deduction is the less glamorous item on that list and often the most expensive one left unaddressed. With the compensation structures already shifting toward profits interests and offices building out genuine institutional infrastructure, the raw materials for a defensible Section 162 structure are usually already in place. What is missing is someone running the math on what the current setup costs every April.
Trading Market Signals provides information for educational purposes and does not offer tax or legal advice. Tax structuring decisions should be made with qualified counsel. Figures are illustrative and as of June 2026.
About Me
Associate Editor of financial news at Market signals where he writes and edits original analysis in and around the wealth management, as well as other parts of the financial markets and economy. He has more than five years of experience editing, proofreading, and fact-checking content on current financial events and politics.
