Constant updates to state rules and regulations create a maze of complexities for managers, including state filing considerations, composite returns/elections, and withholding obligations. That exposure is now compounding due to newer changes — including California's market-sourcing rules, which tax firms based on investor location. Firms nationwide must now reassess their California nexus, and continue to monitor their overall state footprint and filing obligations.
Many states are also decoupling from select OBBBA provisions, creating a patchwork of requirements tied to different versions of the tax code. Certain state non-conformity with items such as Qualified Small Business Stock (QSBS) and business interest expensing is eroding after-tax returns, while OBBBA's SALT phasedown for high-income earners is directly affecting GP principals.
As a result of state and local tax changes, which, if any, of the following actions has your organization taken in the last 12 months/plan to take in the next 12 months?
For many firms, maintaining a footprint in high-tax states is becoming structurally untenable. To ease these pressures, tax leaders are pulling two key levers: legal structure changes and location decisions. Sixty-six percent of asset management tax leaders plan to change their legal structure — up 24 points from last year — and 56% plan to expand or relocate, a 28-point jump year-over-year.
Strategic changes to entity structure and location can help reduce nexus exposure, lower audit risk, and more effectively manage apportionment obligations — creating a materially stronger tax position.
Key Finding #2: Firms Turn to Outsourcing and Co-Sourcing to Scale Resources and Manage Global Complexity
How would you characterize your staffing model in each of the following areas?
Rising complexity and total tax liability growth are also prompting asset management tax leaders to rethink how their functions are resourced and where external support adds the most value.
An outsourced model gives tax departments access to deep technical knowledge and technology that could be cost-prohibitive to maintain in-house — while enabling faster scaling in response to shifting demands. An outsourced model can also shift costs otherwise borne by the investment manager to the funds that require the work.
Within asset management, firm size is a key determinant of outsourcing strategy. Smaller firms tend to have less global tax complexity, but are also more likely to treat tax as a cost center and to outsource broadly as a result.
Larger firms, with broader tax footprints and greater internal resources, may not need to outsource basic functions like income and payroll taxes; however, their international exposure is significantly higher, so they may turn to outside resources for access to additional technical capabilities that help with global complexity.
Key Finding #3: Firmwide Priorities Point to Where Tax Leaders Can Drive the Most Strategic Value
How is the performance of the tax department measured?
Even as firms continue to outsource significant portions of their tax functions, in-house tax leaders remain accountable for driving value in several critical areas.
The first is effective tax rate (ETR) management. Two-thirds (66%) of asset management tax leaders report that their performance is measured against ETR. For asset managers, ETR is a direct drag on investor returns, because tax flows straight through to net internal rate of return (IRR). As institutional LPs place greater emphasis on after-tax performance as a benchmark, disciplined ETR management has become a front-line competitive differentiator. Tax leaders who can demonstrate measurable ETR stability make a compelling case for the function's strategic influence.
The second area is strategic transactions, where deal-stage structural decisions carry direct and lasting implications for after-tax proceeds, carry economics, and overall ETR. The growing variety of deal types in asset management — GP stake transactions, fund restructurings, continuation funds, co-investment vehicles — makes tax input essential, as each structure carries its own distinct requirements.