The “Lender/Manager” Structure: Deducting Your Family Office Expenses
Tax Tips / Family Office
The “Lender/Manager” Structure: Deducting Your Family Office Expenses
💡 Executive Summary
- Problem: Since the 2017 TCJA, “investment expenses” (Sec 212) like Bloomberg terminals, analyst salaries, and office rent are no longer tax-deductible for individuals or simple trusts.
- Solution: Restructure the Family Office into two entities: a Management Company (Manager) and a series of Family Funds (Lender/Investor).
- Result: The Manager charges a fee to the Funds. This fee is “Business Income” (Sec 162), which allows the deduction of all operating expenses against it.
⚠️ THE “PROFIT MOTIVE” TEST
To qualify as a “Trade or Business” (Sec 162), the Management Company must strive to make a profit. It cannot just be a pass-through that charges exactly what it spends. It should charge a market-rate management fee (e.g., 1.0% – 1.5%) and potentially manage some outside capital to prove it’s a real business.
To qualify as a “Trade or Business” (Sec 162), the Management Company must strive to make a profit. It cannot just be a pass-through that charges exactly what it spends. It should charge a market-rate management fee (e.g., 1.0% – 1.5%) and potentially manage some outside capital to prove it’s a real business.
Running a Single Family Office (SFO) is expensive. A staff of 5, high-end software, and cybersecurity can cost $2M+/year. If you structure this incorrectly, that $2M is a personal expense paid with after-tax dollars. If you structure it correctly (Lender/Manager), it becomes a pre-tax business expense.
🧐 Core Mechanic: The Split
1. Management Co (LLC/C-Corp): Hires staff, pays rent. Charges “Management Fee” to Family Funds.
2. Family Funds (LLC/LP): Hold the assets. Pay “Management Fee” to Management Co.
3. The Magic: The Fund deducts the fee as a business expense (if active) or capitalizes it. The Management Co recognizes the fee as income but offsets it with salaries/rent.
1. Management Co (LLC/C-Corp): Hires staff, pays rent. Charges “Management Fee” to Family Funds.
2. Family Funds (LLC/LP): Hold the assets. Pay “Management Fee” to Management Co.
3. The Magic: The Fund deducts the fee as a business expense (if active) or capitalizes it. The Management Co recognizes the fee as income but offsets it with salaries/rent.
Deductibility Comparison (Post-2017 TCJA)
Tax Treatment of $2M Operating Expenses
Traditional Structure (Sec 212)
$0 Deductible (100% Lost)
Zero
Lender/Manager Structure (Sec 162)
$2M Deductible (Fully Offset)*
Optimized
Section 212 vs. Section 162
| Feature | Section 212 (Investing) | Section 162 (Trade/Biz) |
|---|---|---|
| Activity | Managing own money | Providing services for fee |
| Deductibility | Suspended (TCJA 2017) | Fully Deductible |
| Entity Type | Personal / Revocable Trust | LLC / C-Corp (ManCo) |
“If your Family Office is just managing your money, it’s a hobby in the eyes of the IRS. If it’s charging fees and running like a hedge fund, it’s a business. Be a business.”
🔗 Related BMT Playbooks (Internal)
🛡️ The Governance: PTC usually sits alongside the Management Co ⚖️ The Hedge: Using a Captive to insure the Management Co’s risks ✅ The Funding: Family Funds use SBLOC to pay Management Fees🏛️ Institutional Resources (External)
📜 Legal Text: IRC § 162 (Trade or Business Expenses) 📜 Legal Text: IRC § 212 (Expenses for Production of Income) ⚖️ Case Law: Higgins v. Commissioner (The origin of the problem)
BMT designs for tax reality, not theory.