Operational leases (operating leases) are most often offered by the manufacture (IBM, Xerox, etc.). The rental charge often includes maintenance and insurance. The lessor is responsible for payment of personal property taxes. The operational lease generally covers use of an asset for a short time, insufficient for the lessor to recover his cost of equipment therefore, the lessor must have the ability to remarket the equipment (through sale or re-lease) to recover the cost of equipment plus a profit. The operational lease is excellent for the user who needs the equipment for only a relatively short time or is concerned with obsolescence. While rental payments are a legitimate business expense, the expense is high if long term use of the asset is contemplated.
Financial leases (finance leases) are defined as a contract under which a lessee will make payments exceeding the purchase price of the equipment so as to return the lessor’s investment plus a profit. Financial leases are generally for a fixed, non-cancelable term except with a penalty. Lessees are responsible for personal property, taxes, maintenance and insurance. The lessee will generally have an option at the end of the lease term to purchase the equipment, renew the lease for an additional term or return the equipment. The lessee may have a fixed or floating tied to prime interest rate or other index) rental factor however, most leases will have a fixed rate. Equipment warranties from manufacturer and vendor are passed on to the lessee. Financial leases generally offer longer terms than those available form banks or commercial finance companies for loans.
Two Types of Finance Leases
Two types of financial leases exits. Once is a true lease, the other is a lease purchase which is similar to a conditional sales contract. Both leases offer up to 100% financing and are very similar in form. The differences are in the areas of tax treatment, accounting treatment, creditor’s rights and liability for property damage and personal injury.
The lease purchase transaction is not intended by the parties to be a true lease. The equipment is capitalized (shown as an asset) on the lessee’s books and depreciation and interest are expensed for both tax and accounting purposes. Depreciation and the Investment Tax Credit (if any) always belong to the lessee since the lessor treats the transaction as a financing arrangement and has no ownership interest in the equipment. A purchase option is predetermined at the time the lease is executed. This structure is often referred to as a “money over money” lease.
The true lease rental payments are a tax deductible expense. The Financial Accounting Standards Board (FASB), the organization that establishes standards of financial accounting and reporting, criteria cause many true leases to be capitalized by the lessee. Therefore, many lease transactions will be reflected on the financial statement of the lessee. The lessee’s options at the end of the lease term are:
STANDARD AND SPECIAL PAYMENT OPTIONS
“STEP UP” PAYMENT OPTIONS:
1. 120 DAY DEFERRED PROGRAM: Payment in advance as security deposit, then 3 “keep in contact” payments of just $25 per month
2. 90 DAY DEFERRED PROGRAM: Payment in advance as security deposit, then 2 “keep in contact” payments of just $25 per month
3. 7 MONTHS @ $100 PER MONTH PROGRAM: Only $100 to start, and just $100 per month for the next 7 months
VARIABLE PAYMENT OPITONS:
1. ANNUAL PAYMENT PROGRAM: Only one payment in advance, and then no payments for 12 months
.2. SEMI-ANNUAL PAYMENT PROGRAM: Only one payment in advance, and then no payments for 6 months.
3. QUARTERLY PAYMENT PROGRAM: Only one payment in advance, and then no payments for 3 months.
4. SEASONAL PAYMENT PROGRAM: You select in advance which 3 monthly payments you would like to eliminate during the coming years.
5. CUSTOM PAYMENT PROGRAM: You tell us what program might fit your needs best and we will create it for you