The Simple Truth about leasing High-Tech Equipment BY: Michael Coffelt President, National Technology

Once you have completed your due diligency and are confident about your selection, it is time to think about finances. What is the best way to acquire this equipment? In many cases, it is advantageous to consult with your CPA or tax advisor. However, know that you may be able to exercise some tax advantages for this taxable year through the expense write-off (true or operating lease), accelerated depreciation (Section 179) and tax credit through the American Disability Act, (Section 44). All of these tax advantages may be exercised through different types of leases.

Using a True or Operating lease may enable you to expense all of your payments rather than depreciate the asset over a five to seven year period of time and save you valuable tax dollars. To qualify as a true or operating lease, you may not claim ownership of the equipment and will make rental payments over a specified period of time. At the end of the lease you may elect one of the following three options: 1) return the equipment to the Lessor with no further obligation, 2) continue to lease the equipment, or 3) purchase the equipment for its then fair market value.

Under IRS Section 179, up to $24,000 of equipment purchases may be expensed (deducted from taxable income) in 2002 if acquired prior to December 31, 2002. The appropriate lease product to use may be a capital lease or a lease with a fixed purchase option, otherwise known as a conditional sales contract. With this type of lease, ownership/title of the equipment may pass to the lessee once all stated payments have been completed.

Under IRS Section 44, Disabled Access Credit up to the amount of $5,000 may be taken against your 2002 tax liability for “eligible access expenditures” for the tax year that exceed $250 but do not exceed $10,250. The appropriate lease product to use may be a capital lease or a lease with a fixed purchase option. This Disable Access Credit has become a very gray area in regards to dental equipment and should be researched thoroughly by your CPA or tax advisor prior to filing your tax return.

Should You Lease?
According to statistics published by the Equipment Leasing Association of America, almost $200 billion of equipment purchased last year was financed via lease contract. On a percentage basis, lease financing accounts for approximately one-third of all equipment purchases made by U.S. businesses. Considering eight out of ten U.S. companies lease some or all of the equipment needed to run their businesses, doesn’t it make sense to consider leasing as a viable financial alternative? But don’t just take my word for it...read the following comments from business journals on leasing.

“Leasing has clearly gained popularity with small firms... it is so much easier than going to the bank.” - The Wall Street Journal

“Firms now lease everything but time.” - U. S. News & World Report

“Leasing is...one of the few remaining sources of fixed rate financing...there are clearly substantial economic attractions to leasing beyond tax benefits.” - Forbes

Potentials of Leasing:
Tax Advantages: Leasing is most often cited as a preferred financing mechanism because of its potential tax advantages over other forms of financing. For example, if a lease is structured in a certain manner the lease payments, unlike loan payments, can be expensed in the period in which they are paid as a general operating cost. For most lessees this results in a lower after tax cost for the credit. This results in a lower tax liability when compared to depreciating the equipment cost and expensing the interest portion of the loan payments. Expensing the full payment is also easier to account for on a company’s financial statements because only one general ledger entry is necessary to “book” the expense (instead of two entries necessary to account for loan payments).

Conserve your working capital: By utilizing leasing programs a dentist can finance 100% of the equipment cost. Since there are no down payments, security deposits, or origination fees to be paid, a customer can utilize cash and other credit facilities to manage short-term credit needs and generate a return on these assets in excess of the cost of the term financing associated with the acquisition of the capital asset. This same rationale justifies leasing to those dentists who can afford to pay cash for equipment–if they earn a return on assets retained in their business that is in excess of their cost of capital it would be warranted to consider a lease proposal.

Dr. Glenn MacFarlane, DDS, a dentist in Bloomfield, New Jersey, conserves his working capital by deferring payment on his high tech dental equipment which allows him time to market his acquisition to existing patients in addition to attracting new patients. MacFarlane exercised his accelerated depreciation under Section 179 and was able to write-off the majority of his acquisition in one taxable year.

Work within your budget: Leasing allows a company to acquire essential equipment, today, without a large capital outlay from their current operating budget. If a dentist requires new equipment but hasn’t allocated the adequate financial resources, most leasing companies can assist in structuring a viable financing option that will allow for acquisition of the equipment as well as maintaining budgetary integrity.

Dr. William H. Chen, DDS, a dentist in Granite City, Illinois, worked within his budget when acquiring his high-tech laser equipment. Chen decided to maximize his financial investment buy leasing a laser over a greater period of time, which allowed him an immediate return on investment. He received positive cashflow within the first thirty days, and has used his lease expense write-off to offset his taxable revenue.

Beat Inflation: Lease payments are fixed for the term of the lease. When adjusted for future inflation the net cost of the lease will actually decrease while gross revenues increase.

Protect against obsolescence: Many financial analysts acknowledge the benefits of matching the useful life of an asset with the liability associated with that asset’s acquisition. By matching the lease term to the useful life of the equipment a company can match their payment obligations to the period in which the equipment will produce revenues (instead of paying for the equipment “up front” and mismatching the lump sum payment for the equipment with the revenue stream generated by that equipment).

Michael A. Coffelt, President and CEO of National Technology Leasing Corp., is a member of the NAELB and the UAEL. He has tenured director positions for three leasing companies over the past 15 years. Michael has lectured nationally and keeps a very busy life with his wife of 18 years, Lori and their daughter Rachel.