SMALL PRACTICE TAX BREAK - ACT NOW BEFORE THE WINDOW CLOSES
If you are thinking of purchasing new equipment, a lease may be a tax effective option for you to consider.
What is leasing?
Leasing is simply a finance agreement between a finance company (the lessor) and the purchaser (the lessee).
By taking out a lease, you have access to the use of new equipment. In exchange you commit to a monthly lease payment. The lender owns the equipment - title under a lease contract always remains with the finance company.
A finance lease
Most lenders offer a finance lease, which is an agreement where the practitioner who is leasing is responsible for maintaining and insuring the equipment. Usually, all the on-going running costs for the equipment are paid by the lessee.
What is a residual?
A residual is the estimated future value of the equipment, or what the equipment will be worth at the end of the lease. The residual amount is decided at the start of the lease and is usually expressed as a percent of the equipment's price. For example a 40% residual means that it has been estimated that your equipment will depreciate 60% during the term of the lease and that the equipment should be worth 40% of the purchase price at the end of the lease term.
What happens at the end of the lease?
After the lease term has expired you have the option of:
- Making an offer to the financier to purchase the equipment
- Electing to re-finance the residual amount over another agreed lease term
- Relinquishing control of the equipment to the financier. In this instance your lender will sell the equipment. However you remain responsible for payment of any shortfall between the residual amount and the resale price.
- Opting to trade-in the equipment on a new model - remembering that the residual still needs to be paid out.
What are the advantages of leasing?
- Cashflow
Leasing your equipment means that you do not have to use your savings for the purchase. Your finance company will pay for the equipment up-front. This means that you do not have to pay an initial deposit. - Fixed cost
Leases are written at a fixed interest rate over a pre-determined period of months, at an agreed monthly payment. Because you know the variables upfront, planning for the impact on your cash flow is more controllable. - Tax effective
If your equipment is being used for business purposes and to generate revenue, your monthly lease payments are tax deductible. This is an ongoing benefit for the term of the lease. - Ease and simplicity
Leasing is simple. From application through to credit approval and lease termination, the process is straightforward. - Choice
At the end of the lease term, you have a number of options to consider. You have the ability to choose to purchase, re-finance or sell the equipment.
What are the disadvantages of leasing?
- Ownership
If you decide to lease your equipment you have control over its use, however you are not legally its owner until the residual is paid out. - No guaranteed buy back
If you choose to buy back the equipment at the end of the lease your financier is not obligated to accept your offered purchase price. - Early pay out
Paying your lease out earlier than the agreed term usually results in an early payout penalty. - Early pay out
Paying your lease out earlier than the agreed term does not mean that you pay less than the total you agreed to pay when signing the Lease. Early pay out does not necessarily mean that you save money.
When you consider the advantages and disadvantages, leasing is a cost effective finance solution with a range of benefits that suit most practice owners. For more information on leasing options, custom designed for healthcare professionals, please contact your local Medfin Finance Specialist on 1300 361 122.
Because we do not know your individual circumstances please consult with your accountant or tax advisor to ensure the options mentioned in the above article best suit your needs.
