Buying vs. Leasing 101

How to Choose What’s Right for You

By Robert Anthony
Robert Anthony is a writer for Physicians Practice

It’s a question that nearly every medical practice confronts at some point: Is it better to buy or lease medical equipment? Few practices have the resources to purchase expensive equipment outright, and some practices, especially those starting out, may not even have the funds for smaller equipment. What things should you be considering?

Reaping the tax benefits
When it comes to leasing or buying, size matters — the size of the price tag. “If you’re under the $100,000 level, generally purchasing the equipment is going to give you the greatest tax benefit,” said Brent Meyer, a partner at Physicians Accounting Management in Encino, Calif. Meyer bases that figure on a new tax law — Internal Revenue Code Section 179 — that went into effect last May.

“Anytime you purchase an asset that has a useful life of longer than a year, it has to be depreciated over its useful life,” explained Meyer. In the past, you had to expense the value of your equipment over a period of five to seven years, but because of Code Section 179, you can now expense up to $100,000 worth of equipment every year, which makes offsetting smaller purchases easy. The catch is that you must have purchased the equipment in the current year using either out-of-pocket funds or a loan.

For those whose pockets aren’t deep, your profession might help you secure an excellent interest rate for a loan. “If a practice has a good relationship with its bank, it frequently can get a much better rate than other businesses,” said Paul Angotti, president of Management Design, LLC, in Monument, Colo. “Doctors can often get one to one-and-a-half points above prime, and that’s hard to beat.”

The ins and outs of leasing
What if a bank loan isn’t an option? “A lot of times, you’re kind of forced into the situation where you have to lease the equipment because no [bank will] finance the equipment,” said Meyer. That can be the situation with very large purchases or for physicians who are just starting a practice and haven’t yet established credit.

Contrary to popular belief, sometimes not owning the equipment isn’t such a bad idea. For example, if you are contemplating a large purchase of equipment that could become technologically outdated in a few years, a lease gives you the flexibility to update to a newer model without having to put down a large amount of cash.

Most companies offer an operating lease, which is not so different from leasing a car. Under this arrangement, a practice would make monthly payments for a set term — 36 months, for example — and then be given an opportunity to purchase the equipment outright for whatever the leasing company deems fair market value.

Though most leases carry higher interest rates than commercial bank loans, monthly lease payments are still lower because they are based on only a portion of the equipment’s total value. “In a scenario like that, basically what you’re really doing is renting the equipment,” said Meyer.

One thing to watch for is a higher interest rate, coupled with the large buyout payment at the end. In this situation, it is likely you will pay more than you would with a standard bank loan. “Because the leasing company is taking on the risk of what the fair market value is in the end, they’re always going to skew that number in their favor,” noted Meyer.

A different type of lease
Then there are times when a lease isn’t really a lease at all. A capital lease is structured with a set number of monthly payments and a nominal buyout — usually for a dollar — at the end. From both an accounting and tax standpoint, a capital lease is the same as a purchase; you simply don’t own the equipment until after the very last payment.

According to Meyer, some of these arrangements aren’t bad. While many leasers do charge higher interest rates, that’s not always the case. Some leasing companies try to be competitive with banks, which means your capital lease could be as good as a loan.

So what should you do? “Whether you lease or buy just depends on your budget,” said Timothy Pham, an allergist with a solo practice in Acadia, Calif. He considered both options but finally decide to purchase his equipment using a conventional bank loan. Although Pham didn’t receive any special interest rate, he still believed he got the better deal. “Fortunately, because of our specialty, the cost of equipment was not huge, therefore we didn’t have to establish a [large] line of credit. It was still affordable.”

“I would say that probably 90 percent of my clients will purchase their equipment,” added Meyer. “And the 10 percent that don’t purchase their equipment are leasing equipment that is very expensive. For either cash flow or financing purposes, they’re not going to be able to get a loan to purchase the equipment, or they believe that after a few years the equipment is going to be obsolete anyway.”

Of course, there may be still other solutions to providing your practice access to important equipment. MultiCare Specialists of Madisonville, Ky., certainly found one. The practice had recently gone through an expansion, including a significant investment in a new building, and was not looking forward to spending even more money on a needed MRI machine. “The issue for us was basically cash flow,” said Greg Catt, chief operating officer. “It’s pretty expensive [to buy an MRI].” Instead, the practice opted to rely on a mobile MRI unit provided by an outside company — an arrangement that allows them to pay a flat fee per MRI scan and avoid either lease or loan payments.

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