|This type of lease is primarily designed for businesses that want the lowest monthly payment with the greatest flexibility at the end of the lease term. With an operating lease the lessor (funding source) retains ownership of the asset for tax purposes, and the lessee (you) typically claims all lease payments as an operating expense or tax deduction.
- Lower monthly payments, coupled with low initial payment.
- Fast tax write-off: a true lease will generally qualify as an operational expense, allowing each payment to be 100% deductible. *.
- Allows more lease-end options to guard against obsolescence.
- Protects investments and provides a hedge against technology changes.
- Improves financial statements by protecting liquidity ratios and reducing debt leverage.
At the end of the lease term, you can either:
- Upgrade to the latest technology and enter into a new lease.
- Purchase the equipment at its then-fair market value.
- Renew or extend your lease at a lower monthly payment.
- Continue using the equipment on a month-to-month basis.
- Return the equipment with no further obligation.
* A true lease is an IRS term that allows for the lease to be structured so your entire lease payment can be fully written off as an expense. (When leases are structured as true leases, the end user may claim the entire lease payment as a tax deduction.) The equipment write-off is tied to the lease term, which can be shorter than IRS depreciation schedules, resulting in larger tax deductions each year. The deduction is also the same every year, which simplifies budgeting. To qualify as a true lease any option to purchase the equipment must be declared at Fair Market Value at the lease end. Other leases ($1.00 buyouts, etc.) are not given the favored status of a true lease. Please consult a tax professional for more details.