Should You Lease Your Practice’s Medical Equipment?
Originally published on March 14, 2022
Updated on November 1st, 2023
It’s an important business consideration for practices; does it make sense to buy or lease medical equipment? The answer: It depends.
Running a practice often requires cutting-edge technologies and innovations, including machines like cardiac monitors, autoclaves, electrocardiograms and more. Having this equipment on hand keeps a facility relevant and helps provide the best possible patient care. But the cost of owning all of these technologies may be more than a practice can – or should – spend.
Because practices vary in size and the services they provide, it makes sense that physicians question whether leasing equipment would generate the best return on investment. And certainly, one size does not fit all. As reported in a study by MD Magazine, only about one-third of medical equipment is typically paid for directly. The rest is either financed or leased by most practices.
When deciding whether your practice should buy or lease medical equipment, consider the following key factors.
What’s Your Business Model?
Before you begin to weigh your options, examine your business model. If you have a small practice, it may be more financially sound to lease medical equipment. Leases provide predictable, month-to-month expenses, which is a good option for small practices without the available assets or capital to buy equipment outright. A practice may only want to make a short-term commitment up front to make sure the equipment provides a return on investment before committing to buying.
For example, setting up an x-ray room can cost anywhere from $75,000 to $95,000. Depending on your business model and your other services, this might be an unrealistic expense for your practice. Yet leasing the same high-quality x-ray equipment may cost only $1,000 per month (depending on the lease’s terms and your credit history). What’s more, you may be able to apply your payments toward owning the equipment at the end of the lease or replacing it with the latest version.
By examining your business model, you can determine the medical equipment and payment arrangement that fit within your budget and practice.
Qualifying for Section 179 Deductions
Another aspect to consider is that all leasing expenses are 100% tax deductible for businesses. But if it’s a capital lease (leading to your ultimate ownership of the equipment) or you purchase the equipment outright, Section 179 applies. This allows you to deduct all or part of the cost of your equipment in the year you place it in service instead of over time.
To illustrate what this means in terms of leasing versus buying, let’s again use the example of the x-ray machine. Rather than writing off a certain amount per month for your new equipment, you can deduct the entire price of the lease from your gross income, thereby decreasing your tax liability. (Keep in mind that there’s an annual limit of $1,080,000 for Section 179 deductions in 2022.)
Still, the value of the Section 179 deduction requires that you purchased the equipment outright. So it is critical to make sure your device qualifies under the tax code as there are certain requirements in order to take Section 179. If the practice is unable to take this deduction, it may be feasible to deduct the cost through normal or bonus depreciation (discussed below).
Similar to the Section 179 deduction, bonus depreciation helps you get more of your tax benefit at once instead of spreading it over multiple years. However, bonus depreciation is currently a depreciation deduction of 100% of the cost. It’s not limited to the amount of fixed assets you acquire during the year or a specific dollar amount. However, it also has certain requirements that can limit applicability. And once again, the lease must transfer ownership of the equipment to you or you must buy it outright for the equipment to qualify for bonus depreciation.
The Tax Cuts and Jobs Act (TCJA) of 2017 bumped the bonus depreciation from 50% up to 100% of the cost. However, this temporary rate is only in effect through the 2022 tax year. Barring an extension, the bonus depreciation rate will drop to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.
Considering Maintenance and Upkeep
A final consideration in purchasing or leasing medical equipment is the need for maintenance and updates. No matter the quality of the machine, your equipment will occasionally break down or need repairs.
If you lease the equipment, the company from which you’ve rented it will generally make the updates and repairs. As such, modifying the equipment is usually forbidden. This may set you back a few days, weeks or even months with out-of-service equipment, depending on the maintenance team’s availability.
Buying the equipment gives you the freedom to make repairs or customize it (assuming someone on your staff has the skills required). However, having a designated maintenance crew on call for leased equipment makes more sense for smaller practices.
Ultimately, the decision to buy or lease medical equipment depends on the financial terms available, your annual budget and the greatest needs of your practice. It also helps to work with a healthcare CPA, who can guide you through the pros and cons of each option. By examining your business model, credit history, taxes and options for upkeep, your practice can determine whether it is financially and strategically viable to own equipment.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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