Finance & Enjoyment Blog

Clients frequently ask me whether to buy or lease a certain piece of equipment for the medical practice. Before I can answer that question I must consider a great number of facts about the client’s specific circumstances.

The first thing we look at is the current cash flow situation. Is there enough cash in the practice currently to buy the equipment outright? If the cash is there, we can save interest charges that a loan to buy the equipment would incur. 

With interest rates on savings accounts being almost zero these days, and credit being tough to find, paying cash is a good way to finance the equipment. There is not a lot of opportunity for any interest rate arbitrage, i.e. creating a revenue advantage by earning a higher rate of return on excess cash while paying a lower interest rate on a loan. 

The tax ramifications of paying cash versus financing the purchase are very similar. A piece of equipment purchased outright can generally be written off in the year depreciated under Section 179 of the Internal Revenue Code. There are limitations in areas such as overall expense, and whether the equipment is new or used when it is purchased. Our team at KKB can provide guidance in these areas, or you may consult with your tax professional for the various limitations on this method of depreciation. 

Within Congress various tax laws on depreciation are repackaged on a regular basis, and financing limitations are commonly changed. Currently, if the equipment is financed with a loan or capital lease, it is still considered to have been purchased by you, and can be depreciated in the same manner as if it had been purchased outright. The tax liability is the difference of interest expense, or no interest expense, for financing. 

For interest to be deductible for tax purposes, the dollars must be paid, and Uncle Sam subsidizes at your current tax rate. If you need to pay interest of $500 a month, you will save $175 in taxes (assuming a 35% federal tax rate). However, the cash flow is still a negative $325.

If the cash does not exist, or credit is not available for an outright purchase, an operating lease is the next option. A ready analogy to an operating lease is leasing an apartment. You get to use the equipment for a certain period of time in exchange for a fixed payment, usually monthly. In this option, you would have no ownership in the equipment at the end of the lease. You simply walk away from the equipment and the lessor retains ownership. Payments under an operating lease are fully deductible for federal tax purposes. If the monthly payment is $1,000, the net cash effect would be a negative $650 per month, again using the 35% federal tax rate.

Real life scenarios are more complex than the examples listed above. Typically, we would use a customized present value analysis to examine all of the various cash flows (initial purchase, lease payments, tax savings, etc) over the term of the lease. Included would be an appropriate discount rate to convert all of these cash flows into a present value cost of each option. The analysis provides a decision-making tool to help us to procure this equipment through the best option available to the medical practice.

 


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