A new lease on the practice
Whether you are leasing equipment for a profitable veterinary practice or for the premises housing it, the legal and financial burden can be overwhelming. Factor in the economy and leases take on even greater importance. Fortunately, skilled negotiation can lead to your benefit when entering into new leases, restructuring existing leases — or getting out of a current one.
What's the big deal with a lease? After all, monthly rent usually is only a small part of overall costs.
But those costs add up significantly when you commit to making payments for three, five or even 10 years. The practice may no longer need that leased device, or it may move to other premises, but that doesn't take you off the hook for the contracted lease payments.Negotiating into or out of a lease is both an economic and a legal issue.
It is the tax laws, however, that can help make any leasing strategy more affordable.
A U.S. District Court recently rebuffed the Internal Revenue Service by allowing a tax deduction for a lease-termination payment. That's good news for any veterinary practice trying to get out of an onerous lease on equipment, land, software — even leased employees. Today, lease-termination payments in many situations are immediately deductible.
Leases and federal taxes
When you purchase equipment or a building, the cost is a capital expense that generally is deductible over a depreciation period. In contrast, each lease payment usually is deductible as a current expense.
But it is not always that simple.
The first question the IRS usually asks about the transaction is whether it is a legitimate lease or an attempt to circumvent the longer write-off period for a capital expense.
Then there are rules governing "lease-related" expenses.
Although many veterinary practices routinely deduct legal fees as a current expense, the same rules that allow an immediate write-off for lease payments require special write-off periods for the expenses connected with acquiring that lease.
In other words, the cost of acquiring a lease, including all professional fees, must be amortized (i.e., written off in equal installments) over the term of the lease — including the renewal period. At least, the renewal period counts as part of the lease term if less than 75 percent of the acquisition cost is attributable to the unexpired lease period.
Lease negotiations 101
Many find their first experience in renting commercial space to be overwhelming. Commercial leases are lengthy, full of jargon and usually written to the property-owner's advantage.
But not always.
Whether the first lease, a lease renewal or the latest in a long line of lease re-negotiations, the landlord's upfront terms usually are just the starting point. Essentially, everything in the lease is negotiable, including its length, cost, rent increases, tenant leasehold improvements, renewal options, and tenant rights and responsibilities.
The key to negotiating a successful lease is knowing your needs, what the document says and being reasonable in your demands. An understanding of how the tax laws can help reduce out-of-pocket costs is useful, too.
Tenants leasing existing space often find that it includes some usable fixtures. Generally, however, it pays to get estimates on needed improvements so that the total move-in cost is understood before you sign and can be part of the negotiations.
From a tax standpoint, leasehold improvements are considered non-removable installations, either original or the result of remodeling to accommodate the lessee. Such improvements typically are more substantial in a new space, which may consist of only concrete walls and flooring.