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Leasing vs. purchasing: consider return on investment, personal finances
When striving to maintain a vital, competitive practice, it is crucial that an optometrist equip his or her office with the latest technology. Unfortunately, acquiring this necessary equipment often means a significant financial investment for the practitioner and making a decision whether to lease or purchase.
“To be competitive, no matter what kind of practice you have, you’ve got to have these instruments,” said Craig Thomas, OD, who is in private practice in Dallas. “I see a lot of young optometrists coming out now whose business cards say ‘LASIK consultation,’ but they don’t have a topographer. How can you present yourself as a consultant for LASIK if you don’t have a topographer?”
Both new and experienced practitioners are faced with the decision of whether to lease or purchase their optometric instruments. This decision depends largely on the optometrist’s financial situation and level of experience, practitioners say.
Leasing: less financial risk
According to Dr. Thomas, the option of leasing provides practitioners with more flexibility and less risk than purchasing. “If you have reasonable credit, you can pretty much equip an office to whatever level you want without a whole lot of risk,” he said. “So for me, the leasing option is better than purchasing most of the time. Of course, if you have no financial concerns, you can go ahead and buy. But most people are not in that position.”
Dr. Thomas said when deciding whether to lease or purchase, he asks himself a simple question. “The decision variable that I use, primarily, is ‘can I pay for this machine?’” he said. “I have been in practice for 19 years now, and I almost never purchase new technology that cannot generate a fee.”
The size and volume of the practice should also be weighed when making this decision, Dr. Thomas added. “If you are in a busy practice with a high Medicare volume, you can purchase or lease basically any instrument that generates a fee, and pay for it very quickly,” he said. “But if you are in a small practice, then a lot of this won’t make sense. If you get $100,000 worth of equipment and you don’t have the patients to use it on, you will still lose money,” he said.
According to Marc M. Berson, OD, MBA, who practices in Allentown, Pa., the decision to lease should also be based on the type of instrument.
“You have to consider what you will be getting with the lease,” he said. “Certain equipment becomes obsolete more quickly than other equipment. Items like computers, for example, obviously change every 6 months. So perhaps leasing a computer would be more advantageous than leasing something like a phoropter.”
Dr. Thomas added that leasing this equipment is surprisingly easy to do.
“My experience has been that over the last 6 months, these companies have been falling all over each other granting leases,” he said. “It’s a pretty open market. As long as you don’t have a history of bankruptcy or charge-offs, you should be able to obtain $100,000 to $150,000 on a lease pretty easily.”
Leasing good for new ODs
Dr. Thomas also believes that leasing is preferable for many young optometrists because it allows these practitioners to avoid dipping into their own personal funds.
“I was recently in Houston lecturing to fourth year students about how to equip your office without spending a lot of your own money,” he said. “And to me, leasing is obviously the way to go there –that way you can save your bank credit or your personal savings for things that you can’t do any other way.”
Dr. Thomas maintains that leasing also enables the new optometrist to be more aggressive in building up his or her practice. “The traditional building of a practice usually involves obtaining instrumentation as you can afford it,” he said. “I am much more aggressive than that. To me, if you get six or seven machines in there you will build up your practice much more quickly.”
Choosing a lease
Dr. Thomas said there are a few different types of leases for practitioners to choose from. “The only real differences are: do you do a $1 buyout at the end of the lease, do you do the 10% or do you do the fair market value?” he said.
In many cases, Dr. Thomas said, a $1 buyout is perceived as a purchase agreement, not a lease. “Most accountants say you are really buying it, not leasing it,” he said. “And in an IRS audit mode, if you’ve got a lease that says it’s a $1 buyout, they can say it is a lease purchase agreement and not a lease. And then you would not be able to deduct all of those lease payments.”
Regarding fair market value, Dr. Thomas said he generally “strikes it from the language of the lease agreement. Let’s say you bought a $50,000 machine, and you pay for it in 4 years,” he said. “The leasing company could say the fair market value is $40,000. They probably won’t, but they could. There’s no up or down ceiling, and so you could be paying all this money and 4 years later still owe $40,000. So I always strike that.”
Dr. Thomas prefers specifying a 10% arrangement. “My CPA tells me that it is a reasonable enough position as to where the IRS will classify the document as a lease agreement as opposed to a purchase agreement,” he said. “And that is a low enough fee where I don’t feel I am being taken advantage of by the leasing company.”
Section 179 deductions
Dr. Berson discussed Section 179 deductions, which allow for automatic expensing of business equipment purchased during the year.
To take advantage of a Section 179 deduction, a practitioner needs to buy the equipment and place it into service the same year. The Small Business Job Protection Act of 1996 has been gradually raising the business expensing limitation from $17,500, set in 1993, to $25,000 by the year 2003. The limit on the Section 179 deduction for 2002 is $25,000.
Using the original figure of $17,500, Dr. Berson discussed the possible advantages of the Section 179 deduction. “The federal code allows you to fully deduct equipment purchases up to $17,500 per year,” he said. “So if you are going to buy equipment, or something that is worth $17,500, and you need the deduction, then you might be better off just taking it.”
Dr. Berson gave an example of how such a deduction can work to the practitioner’s advantage. “Let’s say you’ve made $20,000 more this year than you did last year, and you are in a 40% tax bracket,” he said. “You are going to pay taxes on that of about $8,000, which is 40% of $20,000. You can either keep the $20,000 in your pocket and pay $8,000 in tax, or you can go buy something that costs $17,500 and write it off completely. Then you will only pay 40% of the difference, which is $2,500.”
Forty percent of $2,500 would leave about $1,000 in taxes, Dr. Berson said. “So you pay $1,000 in taxes and you have this new piece of equipment that is totally deductible,” he said. “So for somebody who is doing well in practice and planning properly, it might be better to take the deduction yourself. Otherwise, you can depreciate the equipment, which gives you an advantage too.”
A personal decision
The decision of whether to lease or purchase depends on individual circumstances, Dr. Berson said.
“I personally don’t lease things – I like to own it, to know it is mine,” Dr. Berson said. “I would rather buy the right equipment at a fair price. If I need the money, I borrow it from the bank on a home equity loan, which is totally deductible. So you can deduct it, depreciate it and it is yours.”
For a young optometrist without much equity in their house or money in the bank, this would not be the most appropriate option, Dr. Berson conceded. “Leasing will be more appropriate for somebody who is just starting out than somebody who is already in practice,” he said.
Dr. Berson did, however, share his approach when first establishing his own practice. “I have been in practice for about 19 years now, and when I first started out, I used the leasing company of Mom,” he said. “It wasn’t a loan. What happened was, she bought the equipment, she owned it, and she set it up as a lease with a $1 buyout. So I paid her a monthly lease payment, she depreciated the equipment over however many years it went and at the end she got the full depreciation.”
Dr. Berson said this method worked very well for him. “At the end, she got her money because I was paying her fair market value, and then I gave her $1 at the end and I owned the equipment,” he said. “If you can find a parent or a relative who is willing to invest in you, it is not a big risk because they own the equipment. They just have to put a little bit of faith in their kid.”
For Your Information:
- Craig Thomas, OD, is in private practice in Dallas. He can be reached at 3900 Wheatland Rd., Dallas, TX 75237; (972) 780-7199; fax: (972) 780-9157.
- Marc M. Berson, OD, MBA, practices in Allentown, Pa., and also writes the “Strategic Management” column for Primary Care Optometry News. He can be reached at 31 S. 9th St., Allentown, PA 18102; (215) 432-1500; fax: (610) 439-0215.