How Leasing Works & Selecting the Right Type of Lease

How Leasing Works
A lease is an easy way to enjoy the benefits of the latest technology without assuming the up-front costs, and risks, of ownership. FYI, we’ll refer to “equipment leases” periodically, but do keep in mind that your lease may include both equipment and services, plus the additional costs of taxes, installation, and shipping.

Simply defined, a lease is a usage agreement between an equipment owner (lessor) and a user of that equipment (the lessee). The lessee pays a periodic fee, usually monthly, to the lessor for the use of the property. Generally, leases take the form of written contracts with specific terms and conditions spelled out: length of lease term (usually 24, 36, 48, or 60 months), amount and timing of lease payments, and any end-of-lease conditions or stipulations.

The lessor is usually viewed as the owner of the equipment during the lease term, but depending on the type of lease chosen, either the lessee or the lessor may be able to claim the tax benefits of equipment ownership.

Selecting the Right Type of Lease
We offer several types of leases for businesses, including True Leases, Finance Leases, and SelectValue.

True Lease
A True Lease is another term for a tax lease where, for IRS purposes, the lessee (the customer) could claim the entire amount of the lease payment as an operating expense or tax deduction. This type of lease typically provides the lowest monthly payment, and can often be structured to meet the requirements for operating lease treatment.

The following options are available at the end of the lease term:
●          Replace equipment with the latest technology
(and enter into a new lease agreement)
●          Renew the lease at a monthly amount based on the equipment’s fair market value and the renewal term*
●          Purchase the equipment at its fair market value
●          Return the equipment to the lessor

Finance Lease
Under a Finance Lease, the lessee (the customer) is able to claim the benefits of ownership for IRS purposes (the lessor, however, is the actual owner). That means the lessee is entitled to claim depreciation and interest expense deductions in lieu of an operating expense deduction. Most common are two types of Finance Leases: the $1 purchase option lease, and the 10% purchase option lease.

$1.00 Purchase Option Lease
This type of lease is suited to businesses that plan to keep their equipment after their lease term ends. At the end of the lease, three options are available:
●          Replace equipment with the latest technology (and enter into a new lease agreement)
●          Purchase the equipment for $1
●          Return the equipment to the lessor

10% Purchase Option Lease
This lease structure is designed for businesses that want the flexibility to purchase, continue leasing, or return the equipment at the end of the term, but want to lock in end-of-lease costs at the time the lease is initiated. At the end of the lease term, the following options are available:
●          Replace equipment with the latest technology (and enter into a new lease   agreement)
●          Purchase the equipment for 10% of the original financed amount
●          Return the equipment to the lessor

SelectValue Lease
Are You Undecided between leasing or paying cash? SelectValue is a unique financing option that provides a lessee with the flexibility to convert to a cash sale. This 36-month Fair Market Value (FMV) True Lease provides a lessee with a 9-month window where they can exercise an early purchase option equal to the original equipment cost, plus insurance and other charges, less payments made to date. One advance payment will be kept as a fee if the early purchase option is exercised.

Be sure to consult your own accountant or tax advisor regarding the tax consequences of your leasing and financing transactions.

*Fair Market Value (FMV) is the price for which the equipment could be rented or sold in a transaction between unrelated parties. The fair market value is determined by the lessor at the end of the lease term.

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