Equipment Leases – Basic Types

$1 Buyout Lease

The $1 Buyout Lease is structured for business owners that are fairly confident that they want to own the equipment after the lease term ends. The $1 Buyout Lease combines some of the benefits of leasing with those of ownership. 

At the end of the lease term, the business may purchase the equipment for $1.

General Tax Classification: Non Tax Lease 
General Accounting Classification: Capital (Finance) Lease 



10% Purchase Option 

The 10% Purchase Option Lease is for business owners that want the flexibility to upgrade, purchase, continue leasing, or return the equipment at the end of lease term. The 10% Purchase Option Lease is also designed for those who prefer to lock-in all costs at the time the lease is initiated. 

At the end of the lease term, the business may choose one of the following:
  • Upgrade the equipment with new equipment utilizing an addendum to the lease

  • Continue to lease the equipment with an adjusted payment

  • Purchase the equipment for 10% of the original financed amount

  • Return the equipment

General Tax Classification: Discretionary (some treat as True Tax Lease, some treat as Non Tax Lease)
General Accounting Classification: Discretionary (some treat as Capital Lease, some treat as Operating Lease)


Fair Market Value (FMV) Lease 

The FMV Lease is structured for business owners that want the lowest monthly payment with the greatest flexibility at the end of the lease term. The business can normally claim each lease payment as an operating expense (tax deduction). 

At the end of the lease term, the business has the following options:
  • Upgrade the equipment with new equipment utilizing an addendum to the lease

  • Continue to lease the equipment with an adjusted payment

  • Purchase the equipment for Fair Market Value

  • Return the equipment

General Tax Classification: True Tax Lease 
General Accounting Classification: Operating Lease


Terminal Rental Adjustment Clause (TRAC) Lease 

The TRAC Lease is exclusively for commercial vehicles and trailers, structured to take advantage of special tax code allowing for stated residual values at lease termination. At the end of the lease term, the vehicle may be purchased for the remaining book value. If the vehicle is sold to a third party for more than the remaining book value, the excess proceeds go to the lessee. If it is sold for less than the remaining book value, the lessee must pay the shortfall. The TRAC Lease allows the business to claim each lease payment as a business expense.

General Tax Classification: True Tax Lease 
General Accounting Classification: Operating or Capital Lease

 

The above descriptions are for informational purposes only. Please consult a tax advisor for advice specific to your situation. 

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