by Bruce Bryen, CPA, CVA
This paragraph will give input into which approach makes the most sense for the dental laboratory owner as we approach the end of the year, or in fact, any time of the year. The last part of the year does have certain advantages if no other tax planning has occurred and the extent of the tax burden that will fall upon the owner has suddenly been realized, especially if it is significant. Many states have tax burdens that rely on the federal tax return for reliance in determining the amounts that are due to it. The dental laboratory has evolved from a labor intensive business into one with the use of a more skilled pool of employee with a high degree of understanding in the use of sophisticated equipment and technology. There may be fewer employees because of the use of the new types of production equipment and the need for service, but they are better trained in the use of the technological changes that have occurred in the industry. The turn around time is faster for the dental clientele and the accuracy of production has a more direct appeal to the dentist with much faster service being afforded to the as well. Now the laboratory owner must decide upon which equipment and technological updates to employ at his or her business as well as whether or not to acquire the items through an out right purchase or through the use of a lease.
Advantages and disadvantages of a direct purchase of the product agreed upon as a priority for the dental laboratory:
One of the advantages of the direct purchase of a state of the art piece of equipment or new technology is that it now becomes the property of the dental lab. Whether an outright purchase for cash or if financed, the equipment will be in house and owned for many years. With the instructions coming from the vendor, unlike a lease, the acquisition will last for years and will be available beyond its IRS guideline useful life in most cases based on the care and maintenance of the item being acquired. Therefore, its use will be at the dental laboratory after the loan is paid off for the purchase or if paid for with cash, it will be a free and clear asset appearing on the financial statement of the dental laboratory. Owning will have huge tax advantages either immediately or over the term that the advisors to the lab and ownership have agreed upon when the tax return filing is ready. Based on the type of business entity chosen by the shareholders or membership interests of the lab, there can even be personal tax benefits accrued as well. The best place for advice about ownership and tax advantages is probably the CPA advising the laboratory owner. This is not a decision to be made with a phone call but one that the CPA for the owner can offer based on his or her complete understanding of the lab and its ongoing activity and projections into the future.
What are some of the disadvantages of ownership of state of the art technology?
An advantage of ownership may be a disadvantage in leasing. With ownership comes the continuing use and the probable longer term of use. Suppose faster and more accurate equipment becomes available in the market place, as is happening constantly with new technology? With ownership and either financed property or outright payment for it, keeping the asset is probably one of the reasons the acquisition occurred. With a lease, the new equipment is available and the older high tech item can be exchanged with little to no cost. As innovation takes place at a more rapid pace, keeping up to date with state of the art assets becomes critical to the business of supplying dentists with their needs as they want an excellent product and top of the line service as well. The tax advantages with an outright acquisition may not occur with the lease depending upon the type of lease that is executed. Training is also something to consider since the purchase, demonstration and training as well as the follow up may have to be repeated with a lease of new equipment based on the complexity of the new item compared to the asset being replaced.
Comparing the costs and speed of delivery with the purchase versus the lease:
One of the values of leasing compared to purchasing is that the leasing companies will almost always provide easy and relatively quick solutions to bringing the item on site. An example is the lease itself. With an acquisition and if financing is needed, the presentation to a conventional lender or to the equipment manufacturer’s representative takes a longer time for approval and is more involved than checking the credit rating for the lease and delivery of the equipment under consideration. The financed cost of the lease may be a little higher than bank financing but the trade off is the speed of determining the qualifications of the lessee and the speed in delivery of the equipment. This is important especially at the end of the year when the on site delivery and the ability of it being in a useable condition determines whether it qualifies for any type of tax consideration for the year in which it was most likely considered.
Implications of deciding whether to buy or to lease new equipment:
Whether buying outright or leasing the assets under consideration, the final decision is one that will have lasting effects on the operation and success of the dental laboratory. Making the correct decision takes time, financial advice and money. Which ever is the best for the laboratory and the owners is something that should not be a decision caused by last minute discussions.