What is capital expenditure?

Capital expenditures are purchases of long-term assets with useful lives exceeding one year, such as computers, furniture, software, and office improvements. Unlike operating expenses that are fully deductible in the year incurred, CapEx is capitalized on the balance sheet and depreciated over time (unless Section 179 or bonus depreciation applies). For consulting firms, CapEx is typically modest and includes technology investments, office buildouts, and, occasionally, vehicles.

Key characteristics

• Purchases of assets with a useful life of over one year

• Capitalized on the balance sheet rather than immediately expensed

• Depreciated over asset useful life (3-7 years typical for consulting assets)

• Section 179 allows immediate expensing up to $1.16M (2024)

• Consulting firms typically have low CapEx relative to revenue

• Planned annually as part of the budgeting process

Why it matters for service firms

Understanding CapEx helps consulting firm owners make informed investment and tax decisions. A $50,000 office buildout can be depreciated over 5-7 years or potentially expensed immediately under Section 179. The tax treatment significantly impacts cash flow: immediate expensing might save $15,000 in current-year taxes while depreciation spreads the benefit over multiple years. For firms planning significant investments, timing CapEx strategically to coincide with high-income years maximizes tax benefits.

Real-world example

Beacon Consulting plans to invest $85,000 in new office space: $45,000 in furniture, $25,000 in technology infrastructure, and and $15,000 in in leasehold improvements. The firm projects taxable income of $650,000 for the year. Their CPA recommends using Section 179 to expense the entire $85,000 immediately rather than depreciating over 5-7 years. At a 24% effective tax rate, immediate expensing saves $20,400 in current-year taxes. If the firm waited and depreciated over 7 years, the same total tax benefit would be spread over 7 years, resulting in a loss of $14,000+ in present value. The CPA coordinates timing so the purchase occurs in December after confirming the high-income projection.