Should You Cut That Service Line? A CPA's Test Before You Kill It

By Craig S. Cody, CPA, Certified Tax Coach.

Most agencies carry at least one service line that's quietly eating their margin, and the owner usually suspects which one. What stops the cut isn't strategy. It's that nobody has shown them what the line actually earns once you count the senior time that never hits a timesheet, and which costs would really leave if it went away.

I've watched clients keep service lines alive that should have been shut down years earlier. When they finally made the call, their margins went up. Every time.

Here's the test I'd run before you cut, so you pick the right line and the cut does what you want it to.

Why Are Agencies Talking About Cutting Services Right Now?

Campaign US recently asked agency leaders how they decide to shut down services that no longer serve them. Brian Kessman, founder of Lodestar Agency Consulting, put the case plainly: many agencies think a narrow focus shrinks their market, when it actually expands it.

The numbers back him up. Promethean Research's State of Digital Services 2026, a survey of 119 agency leaders on their 2025 results, found:

• Agencies that reduced services grew 13%, and Promethean says they posted 30% net margins.
• Agencies that expanded services grew 9.8%.
• Agencies that held steady grew 5.7%.

That's a strong signal, with one caution. A survey tells you that the agencies that cut did well. It doesn't tell you which lines they cut, or how. The agency that cuts the wrong line, or cuts the right one badly, isn't in that 13%. That's the part a CPA can help with.

Why Doesn't the P&L Show Which Line to Cut?

Because the P&L is organized by type of expense, not by service. Salaries, rent and software are each one line. Nothing on it says "paid social cost us this much to deliver."

So owners judge each service by the margin they can see: what the client pays, minus the hours people booked to it. On that view, almost every line looks fine. We've written before about how a blended margin hides lines that don't match, and about running margin by account manager. The shutdown decision needs two more things on top of that.

What Is the Senior Time Nobody Books?

It's the hours you and your most senior people spend propping up a line without ever logging them. The owner who joins every escalation call. The creative director who rewrites the deliverable at 9pm. The strategist who keeps a struggling client from leaving.

None of that shows up in the line's booked margin, because nobody books it. But it's real payroll, and it's usually the most expensive payroll you have.

Here's an example. Say an agency runs $2.4 million of agency gross income (AGI, revenue after pass-through costs like media) across three lines:

Paid social at 50% doesn't look like a problem. Now add the senior time. The owner's fully loaded pay is $300,000, and about a quarter of it goes to paid social fires. A senior strategist costs $160,000, and about 30% of their time goes to the same place. That's $123,000 of real cost the booked view never sees.

Now the line that looked fine is plainly the weakest one in the building. That's usually the moment an owner who's been stalling sees it.

Which Costs Actually Leave When You Cut a Line?

This is the test most owners skip, and it's the one that decides whether the cut raises your margin.

When you shut a line down, some costs walk out the door with it and some stay. In the example:

• Leaves: the two people who deliver paid social, and the tools only they use. That's the $200,000 of booked cost.
• Stays: your rent, your finance and admin costs, your software. And the owner and the strategist. Their time is freed up, but their pay isn't.

So paid social isn't just a 19% line. It's also bringing in $200,000 more than the costs that leave with it ($400,000 of AGI, minus $200,000). Take it away and that $200,000 has to come from somewhere.

Here's the agency's whole year three ways, with $500,000 of overhead that doesn't change:

In the third column, the owner's and the strategist's freed-up time goes into brand and creative, the line clients pay the most for. That supports $350,000 of new creative work for $100,000 of added delivery cost, with no new senior hire. Profit goes up, and so does the margin.

The middle column is the warning. Cut the line, keep the same people doing less, and profit halves. The line wasn't the problem in that column. The plan was.

How Do You Know a Line Should Go?

Run it through four questions:

1. What's its real margin, with the senior time added in? If it's well below your other lines, it's a candidate.
2. What leaves with it? List the people, tools and contractors that would actually go. Everything else stays and gets carried by the lines you keep.
3. Where does the freed senior time go? Name the line it moves to and the work it supports. If you can't name it, you're about to run the middle column.
4. Do you need to keep any of the people who stay? Sometimes the honest answer is that a role existed to hold the weak line together. Not refilling it is part of the cut.

If the line fails the first question and you can answer the third, that's a line that should have been discontinued. That's the kind I've watched clients finally cut, and why their margins went up.

What Does the Tax Code Do When You Wind a Line Down?

The tax side won't decide whether to cut, but it affects what the cut costs you. Three things to plan before you announce it:

• Severance has a year. For an agency on the cash method, paying it on December 30 or January 3 puts the deduction in two different tax years. Pick the year where the deduction is worth more to you, and make the timing a decision instead of whatever happens to land.
• Equipment and software you bought for the line may still have value on your tax books. If you truly abandon those assets, what's left is generally deductible under Section 165. If you already wrote them off with bonus depreciation, there's nothing left to deduct.
• A line you bought is different. If the service came with an acquisition, the goodwill from that deal usually doesn't come off when you shut the line down. Under Section 197(f)(1), if you keep other intangibles from the same deal, the loss shifts onto the ones you keep instead of being deducted now.

The year you cut a line often has lower profit, which means your deductions are worth less that year. That's why we put the wind-down into the year-end projection before the announcement, not after.

Who Is This Not For?

If your agency has one service, you've already done this. If a line is new and still being built, judge it by where it's headed, not by this year's margin. And if the weak line is weak because of one bad client, fix or fire the client before you shut down the service.

This is for marketing and PR agency owners carrying three or more services, who've had a nagging feeling about one of them for more than a year.

Frequently Asked Questions

How do you know when to cut a service line at an agency?

When its real margin, with the senior time it eats counted in, is well below your other lines, and you can name where the freed time and money will go. If you can't name that second part, the cut may lower your profit.

What is the senior time nobody books?

It's the unlogged hours that the owner and senior staff spend propping up a service: escalation calls, late-night rewrites, saving at-risk clients. It's real payroll that never shows up in the line's booked margin.

Does cutting a service line always increase profit?

No. It raises profit when the costs that leave with the line, plus what the freed senior time earns elsewhere, outweigh the AGI you give up. Cut a line and keep everyone doing less, and profit can fall.

Do agencies that narrow their services grow faster?

In Promethean Research's 2026 survey of 119 agency leaders, agencies that reduced services grew 13% in 2025, versus 9.8% for those that expanded and 5.7% for those that held steady. The survey doesn't say which lines they cut.

Can you deduct the cost of shutting down a service line?

Often, yes. Severance is deductible, and its timing decides which year. Assets you abandon may produce a deduction for their remaining tax value. Goodwill from an acquired line follows special rules and often can't be deducted when the line closes.

Cut the Line on Purpose

Kessman is right that focus can grow an agency. But focus pays off when you cut the right line and have a plan for what it frees up. Add the senior time, list what actually leaves, and name where the freed capacity goes. Then make the call you've probably been putting off.

I also wrote a book for agency owners. You can request a free copy at the link below.

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Craig S. Cody is a CPA, Certified Tax Coach, and retired NYPD Lieutenant. His firm works with more than 70 marketing and advertising agency owners every month, helping them keep more of what they make through proactive tax planning.

This article is general education, not advice for your specific situation. Confirm your own facts with your advisor before acting.