Many high-net-worth families think they can deduct family office expenses just because everything is handled in one place, but it’s not that simple. When thinking about tax considerations for your family office, the real focus shouldn’t be on “what expenses qualify,” but rather, how the family office is structured and how it operates.
This is important because in 2025, the One Big Beautiful Bill Act made permanent the elimination of deductions for many investment-related expenses under Section 212, meaning family members are unable to deduct expenses paid to a family office if the office does not qualify as a trade or business under Section 162. Depending on the size and complexity of the family office, these expenses can easily add up to hundreds of thousands or even millions of dollars per year.
The shift toward more sophisticated family office structures
The family office space has become much more sophisticated in recent years. As families build more wealth, they’re taking a closer look at how their family office is organized from both an operational view and a tax planning perspective. More families are realizing that if their office is not set up and operated in the right way, many of the costs of running it may no longer be deductible.
That shift is leading families to move away from informal arrangements and toward more carefully planned, institutional-style structures. Instead of simply tracking expenses across entities or family members, they’re building more formal operating models with defined responsibilities, governance practices, and service arrangements. The goal is to create a structure that supports treatment as a trade or business under Section 162, rather than having those same costs treated as non-deductible investment expenses under Section 212.
Besides improving your tax situation, structuring helps the family make decisions more clearly, reduces risk, and supports long-term wealth planning, succession planning, and governance.
Getting tax treatment as a trade or business
To get the trade/business tax treatment, the family office must meet certain requirements:
- Have a clear business purpose
- Provide services (and not just investments)
- Intend to make a profit and charge fees for its services
- Show that it operates independently
- List formal processes and documentation
When the trade or business standards are met, certain costs such as staff wages, the office’s rent and utilities, and fees for professional services like accounting and legal advisors are deductible.
Three pillars of a sophisticated family office
A well-structured family office typically operates across three core pillars:
- Accounting and tax: This typically covers day-to-day accounting, financial reporting, bill pay, bookkeeping, and coordination of tax filings across individuals, trusts, partnerships, and other family-owned entities or companies. Having this function supports the case that the family office is operating in a businesslike way rather than simply managing passive investments.
- Investment oversight: In a more sophisticated family office, this pillar often includes manager selection, performance monitoring, risk review, liquidity planning, capital allocation, and coordination across multiple investments or generations of ownership. It can also involve evaluating how different investments fit within the family’s broader goals. When handled in a structured and consistent way, this function shows that the family office is offering real services rather than just holding investments.
- Governance, legal, and management: This pillar often includes establishing decision-making processes, documenting roles and responsibilities, managing governance, and creating policies. It may also involve succession planning, family education, and preparing younger generations for their roles as stewards of family wealth. This pillar also handles philanthropy, like charitable remainder trusts or private foundations as part of the family’s legacy goals. The documented processes help demonstrate that a family office is operating like a business.
Key structuring strategies to support deductibility
To support your case that expenses are deductible, consider the following strategies:
- Separate management entity: Set up a distinct entity to operate the family office that is separate from individuals and investment entities.
- Service provider: The family office operates as a service provider for family members, trusts, and investment entities.
- Compensation or fee structure: The family office operates and is paid based upon a profit motive for the services it offers.
- Operational independence: The family office has separate books, accounts, and governance and is not just a pass-through entity.
Without these elements, expenses are more likely to be viewed as investment or personal rather than business.
The Lender Management, LLC case
Recent court decisions have shown just how important structure and operations are when it comes to family office deductibility. The Lender Management, LLC v. Commissioner case is seen as a taxpayer-friendly case where the court looked at whether the family’s activities rose to the level of a trade or business. It helped establish the guidelines for what makes a family office qualify as a business and meet the criteria for deducting certain expenses.
The case showed that courts and the IRS are looking at whether the entity is functioning as a true business with a clear purpose, profit motive, structure, and organization.
For families, this is a reminder that deductibility is not just about the type of expense but about the overall structure and day-to-day operations as a trade or business.
Work with advisors for your family office
Whether you need outsourced family office support, tax guidance, or broader advisory services, it helps to work with a team that brings experience across multiple disciplines.
Experienced family office CPAs can evaluate your family office structure from several perspectives — tax, accounting, charitable planning, and more — so your family can get coordinated guidance to align with your long-term goals.