Medical technology leasing is critical to hospitals and healthcare systems’ ability to compete or – even more simply – exist. Leasing has become the preferred strategy for organizations that can’t absorb the outright costs of expensive technology but need to continuously upgrade equipment to meet patients’ needs.

However, because of a technical aspect of Section 470 of the Internal Revenue Code ("Code section 470") introduced by the American Jobs Creation Act of 2004, tax-exempt organizations will either have to give up a critical feature of leasing or face an increase in rents of 15 percent.

What is Section 470?

Code section 470 of the Internal Revenue Code contains what is known as the "Loss Trapping Rules." These rules diminish the benefits of leasing to tax-exempt entities by limiting a lessor’s ability to use deductions associated with the ownership of equipment to the extent of the rental income generated in connection with the lease of the equipment.

The Loss Trapping Rules were enacted to eliminate perceived tax abuses associated with highly structured, much publicized lease-in/lease-out ("LILO") and sale-in/sale-out ("SILO") transactions. However, the Loss Trapping Rules were not intended to "inhibit legitimate commercial leasing transactions that involve a significant and genuine transfer of the benefits and burdens of tax ownership between the taxpayer and the tax-exempt lessee."

The industry is asking Congress to change the class life of medical equipment to seven years or less so that a fixed price purchase option does not cause a lease of medical equipment to a tax-exempt hospital to be subject to the Loss Trapping Rules. In addition, medical industry associations are encouraging concerned administrators to write their Congressperson to request that the class life of medical equipment be changed from nine years to seven years or less. The industry believes changing the class life of medical equipment will protect standard medical leasing transactions from the impact of the Loss Trapping Rules while maintaining the intent of the rules. However, only time will tell if this letter writing campaign can affect change. HPN

Todd Skulte serves as general manager of North America Equipment Finance for GE Healthcare Financial Services, Brookfield, WI. Skulte was named to his current post in April 2004. Formerly, he was the general manager, Asia, for GE Healthcare Financial Services based in Tokyo, Japan from 2000 to 2004. Prior to that, from 1998 to 2000 Skulte was based in Hong Kong where he helped establish the GE Healthcare Financial Services’ presence in Asia to include launching operations in Japan, India and Australia. Before the Hong Kong assignment Skulte was a self-employed consultant working with hospitals, medical manufacturers and other medical providers in Australia, United States and in Singapore from 1992 to 1998. He has 20 years of experience in the healthcare industry, seven of which have been in Asia. For more information on GE Healthcare Financial Services, call (800) 598-6201 or visit www.gehealthcarefinance.com.