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Archive >
December,
2001 |
Vol. II, No. 12 |
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Should You Lease Or Buy? |
An expert crunches the numbers. |
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Stephen Sheppard, C.P.A., C.O.E. |
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 Recently, a client, a group medical practice, told me they wanted to obtain a new "latest and greatest" laser for plastics procedures; the laser carried a hefty price tag of $100,000. Their question to me was: "Should we lease or should we buy?"
It's a common question, and a good one. The answer, however, isn't as simple as you might think. There's nothing inherently good or bad about leasing or buying. Either financing option can work to your advantage, given your cash situation, tax ramifications, and plans and goals for your facility.
The operative phrase here is "financing option." Whether you lease or buy, you generally are arranging financing for a substantial piece of equipment. If the financing is written up as a lease or as a bank loan, it is simply a monetary tool. Even if you pay cash up front, you are, in effect, loaning the money to yourself with the expectation that this new equipment will eventually pay you back in revenue.
No matter what option you select, you aren't protecting yourself from technological risk. Sometimes clients put it another way: "We don't want to be stuck with an obsolete piece of equipment." While leasing might seem to make that outdated instrument disappear at the end of the lease, you most likely have already compensated the leasing company for taking the technological risk; that cost was built into the lease.
Let's take a look at the benefits of leasing versus the benefits of buying, and compare these to what I call the perceived benefits.
 Why lease?
A primary benefit of leasing is the tax treatment this financing method receives. If the lease is properly structured, all of the lease payment is taken as a business expense in the year that you spend it. The after-tax cost of the equipment may be less than if you buy it.
Here's another way to look at it. When you buy equipment, you must depreciate the cost over the statutory life of the equipment-in the current tax code, for most medical equipment, five years. This is generally as long as or longer than most equipment leases, which allow you to expense the equipment over a shorter time period by taking the entire lease payment as a tax deduction.
Often, another benefit of leasing is that it takes less of your cash "up front." With minimal to no outlay of cash, you receive the equipment and put it to work, earning revenue. By the time the first lease payment is due, that equipment may be earning enough to at least offset (if not pay for) the expense of the lease payment.
Finally, lease arrangements provide their own "security" in the form of the equipment. As such, you aren't typically asked to encumber other assets, such as inventory or accounts receivable, or enter into legally constricting loan covenants that may be required by a commercial bank.
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