State and local tax pressures are prompting asset management firms to overhaul their operational structures, as a growing number of tax leaders consider relocation and outsourcing amid rising audit activity, according to BDO's 2026 Tax Strategist Survey.
Among asset management tax executives, 46% identified the inability to keep pace with shifting regulatory demands as the leading tax risk over the next year—the highest share of any sector surveyed. Separately, 84% of industry respondents anticipate their firm's overall tax burden will increase in the same period.
State audit scrutiny is a key driver. The survey found 92% of asset management respondents view state tax audits as at least a moderate challenge over the next 12 months. California's market-sourcing approach, which ties tax obligations to investor locations, is forcing firms nationwide to reassess their nexus and filing footprint. Meanwhile, several states are declining to adopt provisions of the One Big Beautiful Bill Act, creating further inconsistency. Non-conformity around Qualified Small Business Stock treatment and business interest deductions is eroding after-tax returns, while the federal law's SALT deduction phasedown for high earners directly impacts general partner principals.
In response, firms are reconsidering both legal structures and physical footprints. The survey shows 66% of asset management tax leaders plan to alter their legal structure, a 24-percentage-point jump from the prior year, while 56% intend to relocate or expand into new locations, up 28 points year over year. BDO notes such restructuring can lower nexus exposure, reduce audit risk, and improve apportionment management across jurisdictions.
Rising liabilities and complexity are also reshaping tax department staffing. More than half (56%) of asset management tax leaders expect to increase reliance on outsourced or co-sourced arrangements over the next year, the highest proportion of any industry surveyed, with 48% citing complex regulatory and compliance demands as the main reason. BDO's analysis suggests outsourcing provides access to specialized knowledge and technology that would be costly to build internally, while allowing departments to scale quickly. It can also shift certain costs from the investment manager to the funds. Smaller managers, with less international tax complexity, tend to treat tax as a cost center and outsource broadly, while larger firms keep core functions like income and payroll tax in-house but seek outside expertise for international operations.
Even as more work moves outside, in-house tax leaders are judged on specific metrics. Effective tax rate (ETR) performance tops the list, cited by 66% of respondents, reflecting how directly ETR feeds into net internal rate of return for investors—a metric institutional limited partners are weighing more heavily. Strategic transactions are another major performance area, given how deal-stage tax decisions affect after-tax proceeds and carry economics across GP stake sales, fund restructurings, continuation vehicles, and co-investment structures. Yet 24% of asset management respondents said their tax function is only somewhat involved in strategic transactions, a gap BDO flags as notable.
BDO recommends firms conduct regular assessments of state and local tax exposure, build a deliberate strategy around in-house versus outsourced tax work, and prioritize state-level ETR management—including strategies like pass-through entity tax deductions—to strengthen tax leaders' strategic standing.
