SERIES: Master The Margin Episode 4 | Pharmacy Leasing 101: Capital Lease vs. Operating Lease
Capital Lease vs. Operating Lease 101: What’s the difference and how does it impact your pharmacy?
In this episode of Master The Margin, Scotty Sykes, CPA, CFP and Kathy Blanchard, Senior Pharmacy Accountant take a deep dive into:
- The key differences between capital leases and operating leases
- Why most equipment leases in pharmacies are capital leases
- Best practices for evaluating your financing options
The Master The Margin Podcast Series is your go-to series for independent pharmacy accounting and tax topics.
In this series, we dive deep into understanding your balance sheet, profit and loss statements, key performance indicators, tax advantages, and more.
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More resources about this topic:
Podcast – Master The Margin: Fixed Assets 101
Blog – Tax-smart Depreciation on Pharmacy Buildings and Equipment
Video – The Right Way to Depreciate Pharmacy Equipment
Scotty Sykes, CPA, CFP®: Welcome to another episode of Master the Margin. This is our, we’re still in the asset section, so to speak, Kathy here, but today’s topic is Capital Lease versus Operating Lease. So, I guess that is a liability, but we were kind of brainstorming as we were talking about fixed assets, how this would come into play. But say you buy a robot, and you’re financing it, is that a capital lease or an operating lease? An operating lease is one way to look at it, I think is, it’s just a rental agreement, so to speak. You’re paying a rent payment at the end of the term. It’s no longer, it goes back to the vendor. Or…
Kathy Blanchard, Senior Pharmacy Accountant: Vendor or they offer you an option to buy it out at the end of the lease period. So, for like 20 grand they’ll let you buy it out after you’ve rented it for two or three years.
Scotty Sykes, CPA, CFP®: That’s right, and the capital lease is a lease where you’re making the monthly payments for a set term, but at that end of the term, it’s essentially yours. Maybe you pay a dollar. So that would be a capital lease. Now, the lease itself under a capital lease, for example, most leases are capital in the pharmacy space. And how those work is that asset is, it’s an asset to you. So, the robot is a fixed asset. It’s depreciated, it’s written off over a period of time. And then the lease itself is a liability. You’re making payments on it. You’re writing off the interest expense. The principal is gonna decrease the liability to the vendor. Go ahead, Kathy.
Kathy Blanchard, Senior Pharmacy Accountant: And sometimes that payment includes sales tax, interest, and sometimes a maintenance fee, a monthly maintenance fee. That’s right.
Scotty Sykes, CPA, CFP®: Or an insurance could also be in there.
Kathy Blanchard, Senior Pharmacy Accountant: That’s right.
Scotty Sykes, CPA, CFP®: So, you do need to have that breakout, and you do need to make sure sales tax is being picked up in one way or another…
Kathy Blanchard, Senior Pharmacy Accountant: Amen.
Scotty Sykes, CPA, CFP®: Whether the vendor’s doing it, or you, you have to pick it up. The important piece there is that you don’t want an audit, sales tax audit, which are quite common. And you know, they find a piece of equipment from three years ago, $150,000 robot, you know, no sales tax was paid on it. So, you don’t want to find yourself in that situation. So, the capital lease is you know, even though you’re leasing this equipment you still get to write it off still get that deduction but you’re paying it off over a period of time one thing with capital leases you got to watch out for other than sales tax is that interest rate Kathy.
Kathy Blanchard, Senior Pharmacy Accountant: Yeah, because sometimes they will really nail you with it.
Scotty Sykes, CPA, CFP®: They will hide that rate in that payment. yeah, it’s just $150 a month or whatever.
Kathy Blanchard, Senior Pharmacy Accountant: No, you need to specifically ask what that interest rate is because you might be able to finance it with your bank at a lesser rate and still end up with that piece of equipment but at a much lower monthly payment because of that interest rate. So definitely investigate.
Scotty Sykes, CPA, CFP®: I think that’s about capital leases 101 there, Kathy. I think we covered that pretty good. Operating leases, again, not very common in the industry. That’s more or less a rent payment. The whole payment is essentially just a lease expense type situation. I guess we could get into vehicle leases and whether to purchase or lease a vehicle, that could be a topic for another episode, Kathy. That’d be a good one. Anyway, I appreciate everybody listening in to this quick episode, and we’ll see you next time.
