Medical practices often find themselves trying to keep pace with advancements in technology, but keeping up is easier said than done. Investment in technology places heavy demands on capital resources. As a result, administrators are exploring alternative sources of capital beyond customary bank loans.
Many administrators are taking a fresh look at lease financing and that’s raising some significant questions. Administrators should know what leasing options are available, when leasing is an appropriate solution, and what business issues must be addressed in a leasing program.
When seeking a means to fund expensive but essential technologies, operating and capital leases are two options that administrators should consider. The differences between the two options have to do mainly with the accounting method, the tax treatment, and the ownership of the equipment. Here’s how to determine what approach is right for your practice.
An operating lease is more like the monthly rent that you pay on your medical building. It is a lease with no transfer of ownership interest or title between lessor and lessee.
Unlike with a capital lease, equipment tied to an operating lease is not considered an asset. The operating lease payments are treated as operational expenses on your profit and loss statement.
An operating lease may be appropriate if the asset being financed is not a mature technology and it poses a high risk of technological obsolescence, which would cause major problems for you. It also may be appropriate in any instance where the asset is likely to be used for five years or fewer. Since there is no ownership involved, operating leases offer a great deal of flexibility.
A capital lease is similar to a loan in that you are seeking a long-term commitment to use a piece of equipment with or without the eventual opportunity to purchase that asset. The equipment you are leasing is treated as an asset on your balance sheet and the loan payments are treated as liabilities.
The most common type of capital lease is the full-payout lease, often referred to as a “dollar-out” lease. It functions like a lease-purchase contract in that at the end of the lease term and upon payment of the final lease installment, you will automatically acquire title to the asset. Your accountant treats the related depreciation and the interest portion of each lease payment as expenses to the income statement.
A capital lease may be appropriate when the asset being financed is a mature technology with little or no risk that technological obsolescence would be problematic for you and/or the asset is likely to be used for more than five years. Practices can fully deduct depreciation and lease payments against their income taxes, while only lease payments are deductible with operating leases.
The issue of being the owner of obsolete equipment is one to consider when you are comparing capital versus operating leases. Since you will retain ownership of the equipment at the end of the term of the capital-type lease, you could be the owner of obsolete equipment that is difficult to get rid of but can no longer be used in your field.
Contact ABISA, a consultancy specializing in solo and small group practice management. Visit us at ABISALLC.com.