12 Benefits of Leasing Equipment

Scott Daugherty, for HealthLeaders Media , July 25, 2011
  1. Who should take tax ownership of the asset? Whichever company – you or your equipment finance partner – can best take advantage of the tax benefits associated with the lease should take ownership of the asset.

    If your company can use the depreciation currently and in the foreseeable future to shield current income from federal income tax, then your healthcare practice should own the equipment for tax depreciation purposes. However, if your organization cannot utilize these benefits, it may be best to pass them to the finance company by structuring a true lease transaction and allowing the lessor to share those benefits with your organization in the form of a lower cost of borrowing.

    Given the current ability to depreciate 100% of a qualifying asset’s acquisition cost, it could be quite likely that an organization ends up with more depreciation than it needs. If this is the case, consider switching to lease financing for equipment once the projected taxable income will be covered by deductions. If your organization is a not-for-profit, you can still pass depreciation benefits to a leasing company. The benefit, however, may be less pronounced, and the structuring options are limited.
  1. What are the accounting considerations? Financing can be structured such that it capitalizes both the asset and the liability on the borrower’s balance sheet. Or, it can be structured so payments merely run through the income statement as rent expense with a footnote disclosure regarding the future lease obligation. This decision can have a marked affect on profitability, EBITDA, and balance sheet leverage.

    As you consider these options, be aware that the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have jointly proposed significant changes to current lease accounting. Current lease accounting rules dictate that leases fall into one of two categories: operating (off balance sheet) or capital (on balance sheet). The proposed changes would require capitalization of all lease agreements. These changes are extensive, so it’s important to consider them fully. Additionally, the changes are currently under review following the public comment period, so the end result may be different than what is currently proposed.  The best approach is to talk through the accounting considerations for your organization with a financial advisor.
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