A lease is defined as follows:
Lease: A contract in which one party (lessor) conveys the use of an asset (equipment) to another party (lessee) for a specific period of time for a pre-determined rate.
Factors determining which lease is best for your business requirements are:
- tax benefits, off balance sheet or on balance sheet accounting,
- cash flow requirements
- end of lease options.
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EQUIPMENT LEASING TAX BENEFITS |
| TRUE LEASE |
| The most widely used commercial lease. The "True Lease" allows the Lessee to expense lease payments, thereby reducing tax liability. Companies may use the "True Lease" when trying to acquire the use of equipment under "operating budget" or when trying to limit "alternative minimum tax" liability or simply to control tax liability.
The "True Lease" is also usually accounted for "off balance sheet" in the financial statements. If the Lessee options to purchase the equipment at the end of a lease, he may then capitalize the purchase and take further deductions. |
| CAPITAL LEASE |
| Often referred to as "Conditional Sales Contract". The Capital Lease is used where the Lessee wants equipment costs fixed at end of lease.
Capital leases are accounted for much the same as loans. This lease usually has a $1.00 Purchase Option. The capital lease is usually "on the balance sheet", and usually does not allow as favorable a financial statement presentation when seeking bank borrowings as does the "True Lease".
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CASH FLOW CONSIDERATIONS |
| STANDARD LEASE |
| A typical Standard Lease usually requires the first and last payment up-front and then a level monthly payment for the term of the lease. Terms usually range from 24 to 60 months. End of lease options are listed below. |
| STEP UP LEASE |
| A Step Up Lease is usually used for higher ticket equipment(over $75,000). Your payments start low, and then "step up" to a normal payment. This allows you to acquire the equipment, and put it into production without significantly impacting cash flow. End of lease options are listed below. |
| SKIP LEASE |
| Skip Payment is an option for seasonal businesses. A lease payment schedule that is only due on certain months of the year. This allows you to match your cash flow with your payment schedule. End of lease options are listed below. |
| DEFERRED LEASE |
Deferred payment is used for businesses acquiring income- producing equipment. With the deferred payment program; you have 90 days to use the equipment before your second payment is due. End of lease options are listed below.
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END OF LEASE OPTIONS(EOL) |
| ONE DOLLAR BUYOUT |
At the end of the lease you have the option to purchase the equipment for $1.00. This option allows the lease to be treated much as a conditional sales contract. This lease is usually on the balance sheet and does not show as well as a true lease would when seeking a bank loan. |
| FAIR MARKET VALUE |
| You have the option to purchase the equipment for its fair market value at the end of the lease term. Used to qualify as true lease thus allowing businesses to claim rental payments as tax deductions. |
