Leasing 101: About Leasing

LeaseA lease is a contractual arrangement in which a leasing company (lessor) gives
a customer (lessee) the right to use its equipment for a specified length of
time (lease term) and payment (usually monthly). Depending on the lease structure,
the customer can either purchase, return, or continue to lease the equipment
at the end of the lease term.

Tax Structures

For the business owner, there are two primary types of leases that determine
tax benefits: 1) operating or true leases and 2) capital or finance leases.
A lease is usually considered a true lease if, at the end of the lease term,
the lessee has the option to purchase the equipment at fair market value (FMV).
Conversely, if the lease agreement contains a bargain purchase option, such
as $1 or 10 percent of the original purchase price, it would be treated as a
finance lease. Always consult a tax advisor to determine lease treatment and
for advice on which lease structure is most appropriate for you.

Types Of Leases

$1 Buyout

At the end of the lease term the lessee can purchase the equipment for one dollar.
This structure is ideal if the useful life of the equipment is expected to be
greater than the lease term. A $1 buyout lease normally qualifies as a capital
lease or finance lease. (Consult a tax advisor to verify proper tax and accounting
treatment.)

10 Percent Buyout

Under this structure, the lessee has the option to purchase the equipment for
10 percent of the original cost at the end of the term and the payment is lower
that that in a $1 buyout lease. This structure is ideal is the useful life of
the equipment may be longer than the lease term and the lessee wants a fixed
purchase price. A 10 percent buyout lease usually qualifies as a capital or
finance lease. (Consult a tax advisor to verify proper tax and accounting treatment.)

Fair Market Value Buyout (FMV)

This lease structure normally provides the lowest lease payment and normally
qualifies as an operating or true lease. (Consult a tax adviser to verify proper
tax and accounting treatment.) At the end of the term, the lessee has the option
to purchase the equipment for its fair market value as determined at that point
in time. This structure is ideal if the expected useful life of the equipment
is equal to the lease term, the lessee desires the lowest monthly payment possible
or the lessee desires the maximum tax benefits.

Under all types of leases the lessee as the option to purchase the equipment,
return the equipment or extend the lease at the end of the term.