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Issue #5 - 10.24.06
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Loan or Lease?
Don’t get Stung by Hidden Fees
It’s a great time to be a dentist and an even better time to invest in dental equipment, thanks to Uncle Sam. The question today isn’t whether to buy but how. Should you take out a loan and purchase the equipment outright or should you lease it? Joe Flumian of HPSC, Inc. urges dentists to take a close look at both the tax advantages and the fees involved when considering a loan or a lease.
With a loan, the dentist borrows a sum of money for a specific amount of time and at a specific interest rate. The doctor owns the equipment purchased with this money and can take advantage of certain tax benefits. A lease is a financial agreement between two parties that allows one to use equipment that is owned by the other. It is similar to a fixed term rental. Ownership of the equipment remains with the lender, but the dentist has full, unrestricted use of it. At the end of the lease, the dentist has the option to purchase the equipment at the Fair Market Value or 10%, whichever is greater.
Certain tax benefits apply to either financial arrangement, notes Mr. Flumian. “With a lease, the doctor can deduct his monthly payment as an expense item, such as his rent payment. However, Internal Revenue Code Section 179 does not apply when equipment is leased. In addition, lease payments are taxed, which is something most doctors don’t realize.”
The provisions of Internal Revenue Code Section 179 allow a sole proprietor, partnership, or corporation to expense a portion of most new business equipment immediately, including computer software, in the year it is purchased and the balance depreciated over its useful life.
Tax-law changes over the past few years have further enhanced this benefit. After the 179 write off, under the Internal Revenue Code, 20% of the cost of the equipment may be deducted on your tax return the fist year the equipment is in service. In 2006, a dental practice can expense $108,000 in equipment up to an overall investment limit of $430,000. “In other words, you can either pay the taxes to the government or you could buy new equipment. If you can either help the government or help your practice, why not help your practice?” urges Mr. Flumian.
The tax advantages can be particularly beneficial for dentists that are looking at retiring in about five years and will want to sell their practice. New equipment will make the practice much more marketable, and the dentist will reap the tax benefits immediately. Next year, the write off for Section 179 will drop to $100,000. In 2008, unless Congress changes it, the write off will go down to $25,000.
With a loan, explains Mr. Flumian, the equipment is owned by the doctor and the doctor is allowed to depreciate the cost of the equipment over several years as well as take advantage of the Section 179 immediate tax write off. “Given the tax advantages, for most equipment purchases, a loan makes more sense, unless the doctor’s CPA advises him or her that it would be more beneficial for other tax reasons to pursue a lease, typically that would be a C-Corp type dentist.” The other case in which a lease may be more advantageous for a practice is when the office is purchasing computer equipment. “Computers become obsolete relatively quickly. Sometimes it makes more sense for a practice to lease computer equipment only because you may want to replace it in three –to-five years,” explains Mr. Flumian.
However, before you dash out and take out a loan from your local bank to update your operatories or a lease to replace your computers, be careful you don’t find yourself paying numerous hidden fees, notes Mr. Flumian. “Look at the fees attached to obtaining the loan or lease. There might be application fees, points to pay, insurance requirements. Some lenders require that you obtain life insurance in the amount of the loan or lease. That’s a surprise cost that many doctors don’t factor in. Usually, they only look at the rate and not all the other costs.”
In addition, consider what the lender wants for collateral. “A bank will always take your house, or place a second mortgage on it. Every lending institution will want a personal guaranty.” Take time to do a little comparison shopping of various lenders, particularly those that specialize in medical equipment financing.
For further information, Mr. Flumian can be reached at Joseph.Flumian@ge.com.
Sally McKenzie is CEO of The McKenzie Company, Inc. a nationwide dental management, practice development and educational consulting firm. Working “on-site” with dentists since 1980, McKenzie Management provides knowledge, guidance and personalized systems that have propelled thousands of general and specialty practices to realize their potential. Sally can be reached directly at 1.877.777.6151