Tax and Cash Flow Benefits of Leasing Medical Equipment

Today’s healthcare provider must depend upon very expensive equipment to function and grow their practices and leasing is a common means of financing. As medical technology is ever changing and new equipment enhancements are developed, renting equipment is a logical choice for a variety of reasons. Equipment leasing can keep their balance sheet intact, as monthly equipment lease payments can be classified as operating expenses. This would also allow the provider to benefit from tax deductibility.

According to industry research, over $3 billion of medical equipment was leased last year in the United States. In its simplest form, the lessor purchases the equipment and then rents it to the lessee. At the end of the lease term, the lessee has the following choices: · Buy the equipment · Re-lease the equipment · Rent new equipment · Return the equipment

The worth of medical equipment does not come from owning it, but rather from the results of its use. With renting, there are no large down payments so the lessee’s capital reserve remains intact. Equipment is also more easily attainable than from bank financing, which requires extensive documentation and even personal guarantees. Most any piece of medical equipment can be leased, including CT scans, surgery tools, lab testing machines, x-ray machines, heart rate monitors, and sonograms.

Other benefits from leasing medical equipment:

Flexibility: As the provider’s practice grows and equipment technology increases, leasing allows for the owner to easily add-on or upgrade their package. It is important to build in upgrade features at the inception of the lease. Also, installation and maintenance, and other services can be added to the lease.

Speed: As opposed to bank financing, leasing can provide the needed equipment in a matter of days. Typically, a one-page lease agreement is executed and approval can occur in a matter of hours. It often takes bank loan committees several weeks to approve an equipment loan.

Tax Advantages: An operating lease (also known as a true lease) generally allows the lessee to write off 100% of lease payments made during the year. The equipment write-off is tied to the lease term, which can be shorter than IRS depreciation schedules, resulting in larger tax deductions each year. The deduction is also the same every year, which simplifies budgeting.

Keeping equipment “state of the art”: As mentioned previously, structuring an add-on or upgrade provision in the lease is critical due to the ever-changing technological advances in healthcare. Adding these clauses in the lease agreement lessens the peril of being stuck with outdated equipment.

Maintains capital reserves: Leasing allows you to buy the equipment and tools you need today while spreading out all the payments over time. This provides you with a cash reserve for day to day expenses. Since a true lease is not a long term obligation, it will not show up on your balance sheet, so the company will be more attractive to a conventional lender when or if one is needed in the future.

A physician starting a practice or even acquiring one can benefit from entering into an equipment lease. Purchasing a medical equipment package can cost several hundred thousand dollars and put the provider behind the eight ball from the very beginning. Not only can leasing alleviate that dilemma; it also provides budgetary, tax, cash flow, and upgrade benefits that can allow the provider to flourish for years to come.

Read the Fine Print in Equipment Lease Contracts

Some business people look over equipment leasing contracts carefully. They study words, punctuation marks, sentences and paragraphs. They make notes and question obscure langauge. They then send the document to their lawyer for review and request that changes be made. The attorney then contacts the leasing company to negotiate the most favorable terms. How often does this chain of events occur? Probably once in a thousand times.

Know your equipment. Will it become obsolete during the lease term? Will you need more of it? Less?

Most equipment leases start with acceptance or commencement. On that date, you inspect the stuff and pronounce it fit for service. Then it's yours, even though the equipment is in a lessor's warehouse or in a boxcar. Your lease shouldn't begin until you're using the equipment successfully.

Success is important. All equipment leases include a non-negotiable "hell-or-high-water" clause that makes you pay regardless of whether equipment works. Unless you love paying for equipment that just sits there, be certain it operates when you accept it.

If things are complicated put an engineer or other expert on it. Remember, once you accept, you pay every month, period.

Alternations and other details

Most lessors buy equipment from manufacturers or wholesalers before they deliver it to you. Then they take your money and, perhaps a month or two later, pay on account to the manufacturer or wholesaler.

For 30 or 60 days, your lessor is free to earn interest on your cash. You can try to negotiate this if you pay attention.

Equipment leases can be short or long term. They cover goods ranging from heavy construction equipment to telephone systems and copying machines. Some questions, however, relate to leases of many different kinds of equipment.

Lessees need to know, for example, whether they can move equipment to a new location without written consent for which they may have to pay. Computers and other technology products need upgrades every other week. You need strong lease language if you want the lessor to pay for upgrades, adding costs to lease payments.

Much the same holds true for alterations and modifications, which leasing companies usually accept when they're easy to remove. Additions and alterations, however, may be taxable income to the lessor.

Lease Termination
Early termination probably is the most common equipment-leasing problem because you can't sell goods under a lease. You're a lessee, not an owner.

Often, the termination price is the total of all payments remaining. Other approaches involve preserving the lessor's originally-anticipated yield. If you haven't done so already, this is a good time to call your accountant to help you make the best possible deal and, hopefully, to understand it.

Provisions for early termination, early buyout, subleasing and assignment protect lessees. They are not, however, going to be in that printed-form contract, and they're not going to be in the deal at all unless you put them there.

Other provisions protect you when the lease ends. De-installation date is a key provision. Do you dismantle equipment, crate it and ship in on your dime or the lessor's?

Don't take anything for granted. Most form leases require shipment to anywhere in the United States. Maybe you can cap that, or limit it to a specific distance such as 100 miles. If you want to keep items, can you do so and still send back part of the equipment?

Most leases state a "fair market value" at which you'll return goods to the lessor. You need to understand how that's calculated and what charges it includes. Again, this may be a good time to talk with your accountant.

Equipment leasing continues to be a significant source of financing for businesses of all sizes. To maximize its many advantages, however, you must study every detail in the contract.

Advantages to Leasing Office and Technical Equipment

When you´re starting or growing a business, cash is often in short supply. One way to spend less is to lease essential office equipment instead of buying it. Unlike renting, which is much too expensive to consider as a long-term alternative, leasing computers, fax machines or furniture offers a number of critical advantages:

Leasing improves your cash flow. The main advantage of leasing is that it frees up cash. Equipment leases rarely require down payments, though you may have to set aside some cash for a refundable security deposit. By contrast, loans to finance the purchase of equipment typically require down payments of up to 25 percent or more.

· Leases are easier to finance than purchases. Before extending a capital equipment loan, banks will usually want to see two to three years of financial records -- which most new companies do not have. Leasing companies, on the other hand, usually require only six months to a year of credit history before approving a furniture or office equipment lease.

· Leasing makes it easier to keep pace with technology. Leasing is especially attractive if your business relies upon cutting-edge technology such as the latest computers, communications devices or other equipment. A series of short-term leases will cost you less than buying new equipment every year or two. Some office equipment leases even have yearly computer upgrades built into them -- eliminating that difficult decision of whether you can afford to upgrade or not.

· Leasing allows you to afford more. While you might not be able to afford to purchase those pricey ergonomic chairs your employees are asking for, you may be able to lease them. Better furniture and equipment can create a more professional image and boost ·the perception of the business

Leasing has balance sheet benefits. You may be able to exclude some leased assets and related obligations from your balance sheet. Such moves might improve financial indicators such as your firm´s debt-to-equity ratio or earnings-to-fixed-assets ratio. Bear in mind, however, that accounting rules do require your balance sheet to report assets leased under certain types of agreements.

If you do decide to lease equipment, keep the term short -- two years is ideal. Try to negotiate a "modern equipment substitution clause" that lets you update or exchange your equipment so you don´t end up paying for obsolete technology. And insist upon a cancellation clause that lets you pay a fee to cancel the lease. Note the cost of any cancellation penalty.

Finally, if you think you might want to purchase the equipment after the term of the lease has ended, look for a lessor that offers an option to buy.