What doctors need to know about buying versus leasing equipment

Doctors and hospitals in the U.S. spend nearly $200 billion per year on medical devices, according to a 2015 study by the Advanced Medical Technology Association. And that doesn’t include the computer equipment that has become standard in many medical practices. Furthermore, it can cost $100,000 to open a solo or small practice, and staying abreast of the changes in equipment and clinical decision support tools to deliver top care can add tens of thousands of dollars to a medical practice’s operating costs every year.

But late last year, Congress approved a major change to the federal tax code that allows medical practices to plan their spending and improve their profitability. Help from the IRS Section 179 of the federal tax code spells out the tax break for capital investments by small businesses, but in the past, small businesses could rarely count on it because Congress had to renew the provision every year. Some years, Congress would limit the deduction to just $25,000; in other years it wouldn’t act on Section 179 until the year was almost over. In the waning days of 2015, Congress made the Section 179 deduction permanent.

Small businesses-including medical practices-are now able to write off up to $500,000 in qualifying equipment in the year in which it is purchased, instead of depreciating it over several years. This spares doctors, and their accountants, from tracking the asset over several years’ worth of tax returns and it can significantly lower the practice’s taxable profits for the year in which the equipment is purchased. In addition, because the deduction is now permanent (and will be adjusted for inflation), practices can plan their equipment spending for years to come.

Section 179 applies to both leased and purchased equipment-new and used-so now you need to decide which approach is best for your practice.

Three reasons to buy

There are many reasons why owning your own equipment is appealing, but three points usually drive most decision-making: Full warranty, future resale, and collateral value.

When you buy your equipment, you gain an asset you can sell in the future-and bank the benefits of that sale-or use as collateral for the next stage in your business’ growth. You have the opportunity of getting the latest technology and a full warranty. Need one more reason? There’s also no complicated lease contract to evaluate.

The warranty issue can be complex, because warranties can vary greatly on repair, maintenance and defects. But its mere existence can give many practitioners peace of mind. It can also be comforting to know, when technology changes, that you can resell your equipment to upgrade.

And even though there are other ways for a small practice to obtain funding now without pledging collateral, if you envision an expansion that requires a long-term loan, you will likely still have to pledge some sort of security, such as medical equipment.  Before you buy, however, you will need to make sure the purchase will leave your practice with enough capital for other needs. You will also need to budget for insurance on the equipment.

Three reasons to lease

The alternative to buying is leasing and it, too, has strong arguments in its favor: Improved cash flow, flexibility, and
maintenance.

The average cost of a digital X-ray machine topped $229,000 last year; digital mammography technology was almost twice that, according to the ECRI Institute. Simply put, it can be quite expensive to maintain a cutting-edge practice if you intend to buy all your equipment. Substituting a smaller monthly payment for a large outlay can greatly improve cash flow. If you haven’t looked into leasing, you may also be pleasantly surprised that you can lease many more kinds of medical equipment than you could in the past.

Leasing also offers more flexibility than purchasing. A short-term lease allows you to bring in items for a test drive, instead of buying equipment only to discover it does not meet the needs of your practice. Leasing also can help you to better meet changes in demand: If you operate a practice that caters to snowbirds, you may need more equipment in the winter than in summer months. Why should you bear the cost of that equipment year-round?

Leasing can be a boon if you lack the skills to maintain your equipment, because leasing contracts often come with maintenance plans and without a complicated warranty to evaluate. But leasing isn’t for every practice. When you tally up all the monthly payments, leased equipment will cost more than equipment purchased outright. Leasing also doesn’t give you full control over the asset, which could be important if you need to use it as collateral for a loan later on. In addition, leasing might not be the best option if you think the equipment is something your practice will need for the long haul, although some lessors will offer a purchase option that applies a portion of your lease payment towards the purchase price.

Making the decision

Once you’ve decided whether to buy or lease your equipment, you need to determine how to pay for it. While you could pay for everything with your existing capital, you may be able to qualify for financing for either leasing or buying, either from traditional lenders or alternative finance companies--even if you are getting used equipment.  There are more equipment funding options for medical practices today than ever before.

Some medical equipment companies have their own finance arms, just the way auto dealers do. The last decade has also seen the emergence of alternative funders, many of whom operate exclusively online. Their streamlined application process means funding for a piece of equipment could be in your bank in a matter of days, not weeks or months.