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Capital Lease / Finance Lease / $1 Buyout

May also be referred to as a nominal or ($1) dollar-buyout lease.  These  leases share the advantage of fixed monthly payments but with the guaranteed option to purchase the equipment for a nominal price at the conclusion of the lease. With this type of lease there is no uncertainty about the value of the equipment at the conclusion of the lease as the buyout terms are generally a part of the initial agreement.
 
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Finance type leasea may not qualify under I.R.S. regulations for 100% deductibility.

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The lessee is considered the owner of the equipment (unlike an FMV lease) and maintains full control of the residual value.

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The lessee can however claim the benefit of depreciating the equipment.

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Lessees records the equipment as an asset and the lease payments as liabilities on their balance sheets.

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True Lease or Operating Lease

Also known as fair market value leases. The most notable feature of this type of lease is that its structure does not contemplate a full payout of the cost of the equipment as is the case in a "Finance" type lease.  Two of the common tests are:

 
bulletThe term of the lease is generally not greater than 75% of the equipment's anticipated useful life.
bulletThe present value of the lease payments should not exceed 90% of the fair market value of the equipment using the lessee's incremental cost of borrowing.

A significant benefit is that the monthly payments are also less than on a finance type lease (above) or even a bank loan. Typically the lessee either returns  the equipment at the conclusion of the lease or may  be granted the opportunity to purchase the equipment from the lessor for "the fair market value." Payments under this kind of lease structure are treated (by the I.R.S.) as rental payments and therefore are 100% tax deductible operating expenses. Also, as rental payments, neither the asset nor its corresponding liability need to  appear on the company's balance sheet.  The lessor retains the right to depreciate the equipment.  End of lease features:

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The lessee may have to option to continue renting the equipment

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The lessee may have the option to "re-lease" the equipment 

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The "P.U.T." Option Lease  (Purchase Upon Termination)


This end-of-lease option establishes a mandatory purchase price, usually expressed as a percentage, e.g. "a 10% Put."  This is a technique for lowering the lease payments during the lease term without creating an unknown end-of-lease risk for either the lessor or the lessee.  As with our programs lease payments are fixed.

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TRAC Lease


A TRAC lease is a special type of true lease that is generally used for "over-the-road" vehicles like trucks, tractors and trailers. Special provisions of the I.R.S. code allow for pre-determined residual values (as opposed to "future, fair market values) to be negotiated in advance while maintaining the "full deductibility" of a true lease.

 
bulletThis type of lease is generally less expensive then other leases or conventional bank financing. 
bullet The lessor would retain the rights to any depreciation.

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