OPERATING LEASE (FASB Lease)
Why an Operating Lease?
Leasing provides favorable tax treatment and tax benefits. The IRS considers an operating lease to be a tax-deductible overhead expense, rather than a purchase. As such, lease payments are totally an income expense item. Companies may find this favorable tax treatment to reduce taxable income and may also move the business to an overall lower tax bracket. Each company is unique and should consult their tax advisor.
The most frequent benefit mentioned by lessees is flexibility. By leasing equipment on shorter term operating leases, businesses are protected against changes in their business and against obsolete technology. IT managers, for example, know that whatever equipment is acquired today will be outdated for their needs in a very short period of time.
Leases can save a company from using their current credit line for either the down payment on an equipment purchase or the actual purchase of the equipment. Normal start up costs for leases include only the first month’s rent and any doc fees. This amount is significantly less as an investment than the 20% down for a standard loan.
Balance Sheet management often becomes the primary motivation to lease. Operating leases are not considered long-term debt or liability, so better debt to equity ratios are reflected.
Leasing is asset specific therefore no blanket liens are filed on your property. A UCC will be filed only on the asset you are leasing.
A capital lease classified and accounted for by a lessee as a purchase and by the lessor as a sale or financing, if it meets any one of the following criteria:
(a) the lessor transfers ownership to the lessee at the end of the lease term;
(b) the lease contains an option to purchase the asset at a bargain price (usually $1.00 or in California $101.00);
(c) the lease term is equal to 75 percent or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life); or
Why a Capital Lease?
Down payment is 3% to 6% as opposed to 10% to 20% for a bank loan
In a capital lease, the lessee does not get the tax benefits, however, the lessee can depreciate the equipment over the term.
TRAC LEASE (Commercial Vehicles)
A TRAC (Terminal Rental Adjustment Clause) lease is a modified Open End Lease limited to VIN numbered motor vehicles and trailers used at least 50% of the time for business purposes. It enables the customer to set the residual value of the vehicle at the beginning of the lease, which is used to determine monthly payments.
Higher residual amounts = lower monthly payments = higher purchase options
Lower residual amounts = higher monthly payments = lower purchase options
TRAC leases have several options at the end of the term:
Let us help you determine your best option and assist you with future leasing needs for your business.
Why a TRAC Lease?
First, they allow the lessee to share in the residual sales value of the vehicle.
Second, because the lessee effectively guarantees the vehicle’s residual value, the rentals to be paid during the lease term may be lower than otherwise available.
What equipment qualifies?
From office to warehouse, any equipment that is owned outright and is involved with the daily operation of the business should qualify for sale and leaseback financing. However, equipment age and industry restrictions may apply.
Why a Sale Leaseback?