Practice Strategies

The Benefits of Leasing Medical Equipment

Growing your practice while providing high quality care to patients may entail acquiring new—and often very expensive—equipment. Practices that lack the necessary capital to purchase equipment up front may take out a loan or set up a financing plan, but this can be costly and difficult to arrange. In many cases, leasing offers a convenient, cost-effective, and tax-efficient alternative to buying or financing equipment purchases.

Buying vs. Leasing

Because little or no initial investment is needed, leasing can enable your practice to gain the use of state-of-the-art equipment while conserving capital. Spreading out payments over time helps ensure your practice has cash in reserve to cover day-to-day operations and frees up money for expenditures in other areas, such as personnel and marketing. Establishing fixed monthly or quarterly payments over a predetermined period of time can also simplify the budgeting process.

Under a lease agreement, the owner of property (the lessor) agrees to allow another party (the lessee) to use the property for a stated period of time in exchange for regular cash payments. Equipment leases rarely require the lessee to make a down payment, although a refundable security deposit may be required in some cases.

Before granting larger loans, banks generally ask for extensive credit histories from applicants and may demand personal guarantees. Leasing, by comparison, usually entails less red tape and lower financial risk for the applicant. A leasing agreement may be approved within a matter of hours, instead of the days or weeks often involved in the loan approval process. You may also find that leasing rates are attractive when compared with interest rates on loans.

When properly structured, leasing agreements make it easy to replace, repair, upgrade, or dispose of aging equipment. Given the rapid pace of techno-logical change, it can be hard to predict when a piece of equipment will become obsolete. Lease agreements may provide lessees with options to upgrade or supplement rented equipment during the term of the lease. Some rental agreements also include maintenance, repair, and other support services.

At the end of the lease period, lessees may be given the option of renewing the lease, buying the equipment, renting new equipment, or returning the property and ending the relationship with the lessor. The details of leasing contracts vary greatly, so it is important to consider carefully whether the specific terms offered by the lessor meet the needs of your practice. Lessors may, for example, impose hidden penalties for early termination or for excess wear and tear on returned equipment.

Tax Considerations

There are certain tax benefits associated with leasing. Because leases on property used in a business are considered overhead by the IRS, rental payments on equipment may be fully deducted from business income. The value of this deduction must, however, be weighed against the tax advantages of depreciating property over a number of years.

The federal government currently offers business owners attractive tax incentives for capital investments. Under Section 179 of the Internal Revenue Code, businesses are permitted to take an upfront deduction on qualified equipment purchases, including off-the-shelf computer software. In 2007, business owners can write off up to $112,000 of qualifying purchases. The deduction is reduced dollar for dollar if purchases exceed $450,000, and the remainder must be depreciated. Unless Congress takes further action, however, the expensing limit will fall to $25,000 in 2010, with a phaseout threshold of $200,000.

When capital is available, buying a piece of equipment outright is almost always less expensive than leasing. But the ultimate decision about whether to lease or buy equipment will depend on a wide range of factors, including the base cost of the property, financing charges, tax implications, projected maintenance costs, impact on cash flow and credit lines, risk of obsolescence, and restrictions and penalties imposed by the lessor that limit flexibility.

For more information about our services to the healthcare industry, contact:
Maxine Lawyer, CPA, Partner - Dallas/Fort Worth at 972.448.6905 or
Philip Fox, CPA, Partner - Houston at 713.297.6914.

The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.
© 2007