Types of Leases
Operating Lease (FMV)
The most classic equipment leasing option available, an operating lease
(or true lease) structures the lease agreement to provide 100% tax
deductibility on lease payments as a capital expense. The leased
equipment is classified as a rental, allowing the lessee to transfer
obligation of the equipment to the lessor at the end of the term.
Capital Lease ($1.00)
The optimal choice for long-term equipment plans and intended eventual
ownership, a capital lease (similar to a finance lease) classifies
equipment as being owned by the lessee, allowing the lessee to claim tax
deductions on the equipment depreciation. A capital lease usually
provides a more attractive purchase incentive at the end of the lease
term.
Most Common "End of
Lease" Options
$1.00 BUY OUT
Also known as a capital lease and finance lease, $1.00 buy out is the
closest option to straight bank financing. The lessee fulfills payment
requirements for the duration of the lease, and once final payment is
made along with $1.00, he/she becomes owner of the equipment.
Additionally, equipment must be shown as an asset and depreciated. It is
not recommended that the equipment be written off as a rental expense.
This simple option requires no further obligation, but one might keep in
mind the monthly payments are slightly higher than an operating lease.
FAIR MARKET VALUE (FMV)
Also known as an operating lease, this option may be tax deductible
under IRS guidelines and payments can be written off. The equipment can
be purchased at the end of the lease for its current fair market value
(an estimated 10%) or the lessee can return the equipment with no
further obligations.
10% PUT or PURCHASE OPTION
Also considered a combination of the capital and operating leases, this
option can be 10%, 15%, or 20%. The lessee has the option to pay a
predetermined percent of the original equipment cost at the end of the
lease, or walk away. By leaving a residual at the end of the lease, the
monthly payments are lowered. Tax benefits can also be taken advantage
of.
