The structural position
A consultancy is an excellent business to own. Margins can be exceptional, working capital requirements are minimal, and there is very little between revenue and profit. Those same properties create a specific and rarely articulated tax problem.
A business that must buy things in order to operate generates cost recovery, basis, and a balance sheet as a consequence of existing. None of that is clever planning. It is a by-product. A business whose principal asset is a person generates none of it.
| Capital-intensive business | Low-capex practice | |
|---|---|---|
| Depreciable asset base | Substantial, and renewed as assets are replaced | Laptops |
| Cost segregation | Frequently worthwhile | Nothing to segregate |
| Basis for losses | Created by asset purchases and debt | Minimal |
| Natural shelter | Arises from operating | Must be constructed deliberately |
| Enterprise value on exit | Assets plus goodwill | Often little without the principal |
What is actually available
Being clear about this matters, because the category is poorly served by generic advice written for businesses with assets.
- Entity structure and classification, which determine how income is characterized. Usually the largest single lever in this category.
- Retirement architecture, which for an older high earner with few employees can absorb a considerable amount and is the most commonly unused option.
- Timing, where the practice has genuine discretion over when work is billed and collected.
- Genuine business expenditure, properly substantiated. Real but rarely transformative at this income level.
- Outside asset positions, which supply shelter the practice itself cannot generate. This is where a sequenced approach does most of its work for this segment.
The exit problem behind it
There is a second consequence worth stating plainly. A business that cannot operate without you is difficult to sell and produces nothing once you stop.
For an owner of a capital-intensive business, the business is itself a retirement asset. For a consultant it frequently is not. Whatever funds the years after the work has to be accumulated outside the practice, deliberately, while the income is still arriving. That is a planning obligation the manufacturer does not carry in the same way.
Where this lands
- 01Stop benchmarking against business owners with assets. The comparison is not informative and the advice written for them will not fit.
- 02Treat entity classification and retirement architecture as the two primary levers, because for this profile they usually are.
- 03Accumulate outside the practice on purpose. The practice is unlikely to be the exit.
- 04Act before year end. Almost everything available to a low-capex business is a decision with a deadline rather than a filing position.
General information only. This article describes law and practice as we understand them at the time of writing. It is not tax, legal, accounting, or investment advice, it does not consider your circumstances, and it does not create an advisor-client or attorney-client relationship. Odyssey Strategic Advisors LLC is not a law firm and is not a CPA firm. Confirm any position with your own tax professional before acting on it. See our disclosures.