There are many types of leases and payment structure options for leasing accounting equipment. The one that you choose will depend on the needs that your business has.
Leasing works for any type of business. Nearly 80% of American companies lease equipment and 90% say they would lease again, when they need to acquire new equipment. One of the limitless possibilities associated with lease financing options is that you can lease almost anything. It does not matter if the accounting equipment that you need is software or hardware; you can lease anything associated with the operations of your business. With that said which are some of the common payment structure options for leasing accounting equipment?
Common Payment Structure Options For Leasing Accounting Equipment
Fair Market Value
This payment option allows you to purchase the accounting equipment at the end of your lease term at fair market value. This is a very significant factor when your lease is considered an operating lease by the IRS. Over the term of the fair market value lease, you can deduct monthly payments. The structure of a fair market lease is very useful when you want to upgrade your equipment before your lease term expires. The following are some of the options that you can choose from at the end of your lease:
- You can deduct the monthly lease payments as operating expenses over the period of the lease.
- You can renew the lease
- You can purchase the equipment at fair market value
- You can return the equipment
In this case, the leasing company will be taking a risk in the sense that they may underestimate the value of the accounting equipment at the end of your lease, meaning they will have to sell the equipment to you at a loss. Moreover, technology advances may make the equipment obsolete and unsellable.
Full Pay Out
At the end of your lease, your lessor will automatically transfer ownership of the accounting equipment to you. The structure of this lease when leasing accounting equipment is similar to a loan arrangement that you would make with a bank.
With a full pay out lease, you are not allowed a trade-in at the end of the lease; instead, you can purchase the equipment at a nominal fee or own the equipment automatically. Upon entering such an agreement, it means that you will depreciate the equipment from your taxes over a certain period, usually five years.
This type of a lease agreement is perceived as pure financing because all the risks of ownership are transferred to you. The IRS recognizes this type of a structure and requires you to capitalize the asset.
Usually, when leasing accounting equipment, a capital lease does not have a financing structure that a typical operating lease would have. The following are some of the conditions that a capital lease has to fulfill in order to be shown on the balance sheet.
- If ownership of the accounting equipment reverts to your ownership automatically at the end of your lease term.
- If ownership of the accounting equipment reverts to you after you have paid a bargain purchase option at the end of your lease term
- If the value of minimum lease payments you make over the period of your lease term exceeds or is equal to 90% of the fair market value of your equipment
- If the term of the leasing is more than 75% of the equipment’s useful life.
With a deferral structure, you can enjoy extended non-standard payment terms. A lease transaction may be included with a deferral feature. In such a case, you will not start making payments until 90 days are over. Deferrals are for lessees who wish to install their equipment before their capital budgets have been approved or at the end of the year when they are likely to receive favorable tax treatment.
If you are not sure which payment structure you prefer when leasing accounting equipment, consider seeking the services of a trusted and credible financial advisor. What works for one business may not work for you. Consider what your current cash flow situation is, how long you will be using the equipment, if it will need regular upgrades and if you plan to own it at the end of the lease period. From there, you can decide which type of lease and payment structure is suitable for you.
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