• Title passes automatically by the end of the lease term
• Lease contains a bargain purchase option
• Lease term is greater than 75% of estimated economic life of the equipment

Present value of lease payments is greater than 90% of the equipment’s fair market value. A Capital Lease is treated by the lessee as both the borrowing of funds and the acquisition of an asset and corresponding liability (lease payable). Periodic lessee expenses consist of interest on the debt and depreciation of the asset.

A lease that is treated as a true lease (as opposed to a loan) for book accounting purposes. As defined in FAS13 13, an operating lease must have all of the following characteristics:

• Lease term is less that 75% of estimated economic life of the equipment
• Present value of lease payment is less than 90% of the equipment’s fair market value
• Lease cannot contain a bargain purchase option (i.e. less than the fair market value)
• Ownership is retained by the lessor during and after the lease term
• The lessee accounts for an operating lease without showing an asset (for the equipment) or liability (for the lease payment obligations) on his balance sheet. Periodic payments are accounted for by the lessee as operating expenses of the period.

• Application-Only limits: $5,000-$100,000
• Full Financial limits: $100,000 or more
• Term: 24-60 Months

*All terms are subject to final credit approval

Types of Leases

The Fair Market Value Lease: Fair Market Value leases offer the lowest monthly payments and may qualify as an operating expense for tax purposes. Fair Market Value payments are true rental payments. When the lease ends, the customer can return the equipment, continue to lease it month to month, or purchase it at its fair market value.

The 10 % Purchase Option Lease: This lease has a slightly higher monthly payment but offers the security of a fixed purchase price at the end of the lease, 10% of the original purchase price. Any time the purchase option is fixed, it increases the likelihood that the lease will be treated as an installment loan for tax purposes. The major test is whether 10% of the original purchase price represents a “bargain purchase price.” You should consult with your accountant for a final recommendation.

The Dollar Buy-Out Lease: This lease is similar to a loan. The customer owns the equipment, makes monthly payments to the leasing company, and can usually take advantage of tax benefits such as interest deductions and depreciation. At the end of the lease term, the customer simply pays a $1 buyout and the equipment is theirs with no further obligation.

IRS GUIDELINES

The IRS classifies a lease as an installment sales contract rather than a “tax lease” if it meets one or more of the following conditions:

• Portions of the rental payments are specifically applied to equity in the property
• Title to the property will transfer to the lessee upon payment of the rental payments
• The amount paid in rental payments over a relatively short period of time is an excessively large portion of the total sum required to secure transfer of title to the property.
• The sum of the agreed upon rental payments materially exceed the fair rental value of the property indicating the payments include an element other than compensation for the use of the property
• The taxpayer can acquire title to the property under a purchase option price that is nominal in relation to the value of the property at the time the option may be exercised
• Some portion of the rental payments is specifically designated or readily recognized as interest

Businesses can deduct the full amount of their lease payment if all the above conditions are false. If one or more of the above conditions is true, the lease is considered to be an installment purchase and the lessee will only be allowed to deduct a depreciation amount and the ”interest” portion of the rental payment.