Types of Leases

Did you know 80% of all businesses lease and 30% of all assets acquired in the United States is through leasing?

Businesses recognize that the value of equipment comes from its use, not its ownership. Leasing is a convenient finance solution that can be customized to meet a businesses' cash flow needs including deferred or skip payments.

What is a Lease?

A lease is an agreement in which the lessee has the right to use equipment for a specific period of time. The contract obligates the lessee to make periodic payments to the lessor for the use of the equipment. At the end of the lease term, the lessee may have the option to purchase the equipment based on the purchase option.

Tax Lease versus Non-Tax Lease

For IRS purposes, a lease falls into one of two categories: Non-Tax Lease or a Tax Lease - each has different types of end of lease purchase options.

Non-Tax/Capital Lease

The benefit of this lease type is the ability to take advantage of IRC Section 179 and expense up to the amount allowed for the year that the equipment is installed. You may depreciate any excess on the depreciation schedule for that particular asset. Examples of this type of lease include $1.00 Buyout, Security Deposit equals Buyout (SD=BO), and 10% Purchase Upon Termination (PUT) leases.

$1 Buyout or Lease to Own

This lease allows the lessee to own the equipment for $1 at the end of the lease. The following options are available at the end of the lease:

• Purchase the equipment for $1
• Upgrade the lease

Security Deposit = Buyout (SD=BO)

This option is similar to the $1 Buyout option except the end of lease options are:

• Purchase the equipment for the amount paid as a security deposit
• Upgrade the lease

10% Purchase Upon Termination (PUT)

Under this lease type, the lessee must purchase the equipment at the end of the lease term at 10% of the original equipment cost, so the following options are available at the end of the lease:

• Purchase the equipment for 10% of the original cost
• Upgrade or renew the lease

Tax Lease/ True Lease

This lease type allows the lessor to retain ownership at the end of the lease. Many rental contracts qualify as a true lease including a 10% Option and a Fair Market Value lease. Lease payments paid by the lessee are deductible for federal tax purposes. The following are tax leases:

10% Option

The 10% Option guarantees a 10% residual on the equipment, and allows the lessee the option of purchasing the equipment for 10%. This lease offers the following end of lease options:

• Purchase the equipment for 10% of the original cost
• Return the equipment
• Upgrade the equipment or renew the lease

Fair Market Value (FMV)

This is a good lease option for companies that upgrade to new equipment every few years. This lease provides the lowest monthly payment as well as three options at the end of the lease term:

• Purchase the equipment for fair market value
• Return the equipment
• Upgrade the equipment or renew the lease

Please consult your accountant or tax advisor to evaluate the best tax solution for your company.

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