United States: US Tax Reform - Single Family Offices And Considerations For 2018

Last Updated: January 18 2018
Article by William Kambas, James Brockway and Joshua Becker

In this article, we present some thoughts on how the Tax Cuts and Jobs Act of 2017, officially known as "An Act To Provide For Reconciliation Pursuant To Titles II And V Of The Concurrent Resolution On The Budget For Fiscal Year 2018," (the "Act") will impact single family offices in 2018 and beyond. The Act is effective January 1, 2018, but many of the individual provisions have a sunset date of December 31, 2025, whereas the corporate changes have no such expiration date.

Maximizing economic efficiency

The Act has no doubt created a tidal wave of questions and concerns about the structuring of various business and investment activities. For families with multi-generational business or investment concerns, tax changes affecting the efficiency of their family enterprises is a leading issue. The Act will certainly affect families with family offices and their managers. This note will specifically address key developments in tax reform that may affect family offices and family office managers.

Structures implemented to manage a family enterprise are as diverse as the families they serve. While there is great variety in the nature and scope of family offices, certain common structural features do emerge. This article therefore addresses tax reform in the context of the single-family office from three general perspectives: first, the corporate family office (a family office structured as a US C corporation); second, from the "fund style" family office (a family office structured in a manner similar to a private placement fund or investment management partnership); and third, certain key points that will generally affect families and their family offices, regardless of whether the family office is structured as a corporate vehicle or fund style vehicle.

I – Corporate style family offices

Family offices formed as corporate vehicles will be affected by the many changes that were enacted to enhance corporate business operations and reduce tax costs for C corporations. Therefore, corporate family offices will likely see a benefit from tax reform. Relevant changes include:

  • A new 21 percent flat corporate income tax rate now applies to C corporations, including personal service corporations. However, the personal holding company and accumulated earning rules still apply and therefore deemed dividends taxed at 20% of undistributed personal holding company income or excess accumulated taxable income to the C corporation shareholders are still a relevant risk.
  • The corporate alternative minimum tax has been repealed, therefore corporations will benefit from tax credit planning going forward. Corporations will also be better able to use life insurance planning in light of the corporate AMT repeal, as proceeds of corporate owned life insurance will no longer be taxed under the corporate AMT.
  • The Act limits the net operating loss ("NOL") deduction to 80% of taxable income and provides that amounts carried to other years be adjusted to account for the limitation for losses arising in years beginning on or after January 1, 2018. The Act also eliminates NOL carrybacks, but allows unused NOLs to be carried forward indefinitely. As such, single family offices with income generating operations but historic losses, or cyclical economic activities with income in some years and losses in others, will find that tax liabilities may become more likely, thereby adversely affecting cash flow.
  • Corporate taxpayers, with average annual gross receipts of less than US$25 million measured over the three prior tax years, can elect to use the cash method of accounting. This election will simplify tax reporting and constitute a change in accounting method but any adjustments can be spread over four taxable years.

II – Single family offices in a "fund style" structure

Family offices established as pass-through vehicles (partnerships, S corporations, and certain LLCs) will also be affected by the many changes that were enacted, in particular the new pass-through entity provisions allowing for a new deduction on certain types of income. Relevant changes include:

  • 20 percent deduction available to non-corporate partners in partnerships (and other flow-throughs) that generate "Qualified Business Income" or QBI; however, such deduction cannot exceed the greater of (i) 50 percent of wages paid by the trade or business and (ii) 25 percent of wages paid by the trade or business plus 2.5 percent of the original tax cost of certain depreciable assets. QBI is essentially income that is effectively connected with a US trade or business. However, income generated by certain services is specifically excluded from the definition of qualified business income. This includes accounting, legal, and investment services. Therefore, family offices that provide these services would not be eligible for the 20 percent deduction associated with the generation of QBI. Ambiguity remains, however, and we anticipate that US Treasury guidance may provide much needed clarity in this area.
  • Business activity loss rules will also come into greater focus for family offices and their investment entities because there is a new limit on use of excess business losses by non-corporate taxpayers. The new rule limits use of business losses to offset other types of income to US$500,000 per taxpayer. This rule could significantly affect active real estate developers / investors with business losses who have historically offset portfolio, carried interest or compensation income with active business losses from other sources.
  • If the calculation of tax under the limitations described above creates a less efficient outcome than previous income and loss offsetting, investors may want to consider private REIT or proactive PFIC planning. In both of these cases, the netting of income and expenses/losses maybe more flexible than the standard rules of the Act and Joint Committee explanations provided thus far. We are expecting the US Treasury Department to issue regulations that could provide much needed clarity in this area.
  • All deductions for "miscellaneous itemized deductions" are eliminated and deductions for state income taxes are limited to US$10,000 per taxpayer through December 31, 2025. The miscellaneous itemized deduction exclusion means that expenses incurred for the production of non-business income of a taxpayer would be disallowed. Family offices are often funded with fees charged against investment entities and this disallowance may change the pattern of family office funding from a fee model to a distributive share (profit interest) model. Additionally, there is also a late 2017 Tax Court case, Lender Management, LLC v. Commissioner, that could cause family office operations to be restructured so as to generate more business expenses rather than investment expenses.
  • Profits interests issued by a single family office to key persons in the form of a carried interest are now subject to new limitations. Prior to the Act, profits interests were treated like any other partnership interest, allowing a profits interest holder to report partnership income based on its underlying character. Consequently, holders of profits interests benefited from long-term capital gains rates to the extent their distributive share of partnership income related to such long-term gains. Under the new rules of the Act, a holder of a profits interest may only receive the benefit of long-term capital gain treatment if the assets in question have been held for three years or more. While many investments are made with an anticipated holding period in excess of three years (real estate, private equity, venture-capital, etc.) some are not. For example, in some distressed situations, the investment strategy may be to acquire and then divest within a 12 to 18 month period, which would presumably be caught by this new three-year limitation. We are expecting further guidance from the US Treasury Department.
  • While not part of the Act specifically, new partnership audit rules effective January 1, 2018 will greatly impact (i) how partnerships are audited by the IRS and (ii) which partners become liable for adjustments to partnership income and losses. ( See the Withers Bergman LLP client alert link here).

III – General observations applicable to all

The Act limits the interest expense deduction against active business income for all taxpayers. As a general matter, the ability of any active business to deduct interest expense is now limited to 30 percent of entity level adjusted gross income. There is no grandfathering for historic debt. However, any accumulated and unused interest expense can be carried forward indefinitely. There are some important exceptions, including for smaller businesses (those with average annual gross receipts of US$25 million or less over a three year period) and for those in the real estate sector to whom this interest expense deduction limitation does not apply if an election is made. Electing real estate businesses would be required to lengthen asset depreciation periods; however, these extensions are not meaningful.

Preserving cash flow through the use of Section 1031 like-kind exchange is now limited to investments in the real estate sector. Like-kind exchange benefits for luxury assets and other tangible personal property (such as art, aircraft, and boats) are no longer available through Section 1031, although some investors may still benefit from similar deferral strategies through the use of certain investment partnership vehicles.

The Act contains significant changes relating to executive compensation, including a new excise tax on tax-exempt organizations that pay an employee compensation greater than US$1,000,000 per year. This new tax may affect certain family office structures with private foundations. In some cases, family structures may want to consider restructuring executive compensation so as to avoid the new excise tax. ( See the Withers Bergman LLP client alert link here).

Deductions relating to meals and entertainment and fringe benefits have been reduced, which could have a noticeable effect on larger single family offices that employ numerous employees. Under the Act, meals are limited to a 50 percent deduction and entertainment expenses are no longer deductible. Employee parking expenses when payment is made by a family office itself are also no longer deductible absent changes to the parking expense reimbursement plan.

Since most single family offices are not asset intensive, new rules allowing immediate expensing and depreciation (with higher tax-deductible amounts) for assets held may not be of great consequence. However, those running family offices that are capital asset heavy, such as those in the real estate development business where the family office may own and lease heavy machinery for use by various development entities, should keep this change in mind.

Finally, regardless of how a family office is structured, family office decision makers should carefully consider how to structure underlying investments going forward, as the Act represents a paradigm shift with respect to choice of entity. Choice of entity decisions should consider the facts and circumstances of each business or investment so as to ensure tax efficiency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions