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:
*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:
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.
For businesses with a consistent revenue stream, we offer quick-access Working Capital Loans and cash advances. When you’re approved in our program, you’ll receive a lump sum of funds that are automatically deposited into your bank account.
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