Madison Equipment Financing

A Tax Lease, also known as a True Lease, means that you will have use of the commercial equipment you need for the term defined in the lease. With this type of lease, you pay only for the use of the equipment. However, you will not have legal ownership of that equipment.

With this type of lease, you have several options at the end of the lease term. You may:

• Purchase the equipment at fair market value
• Extend the lease, or
• Return the equipment

The Tax or True Lease could be your best option if the equipment you need is subject to rapid technological advancements, as, for example, with computers. This kind of lease can mean lower monthly payments, and in many cases, tax deductions for your monthly payments as an operating expense.

With a Capital Lease, the equipment you need is listed as a sale for accounting purposes: at the start of the lease period, the equipment vendor lists it as a sale and you list it as a purchase. This allows you to treat the equipment as an asset and claim it as a deduction. You can also deduct the interest expenses.

One of the following provisions must be included in the lease in order for it to qualify as a Capital Lease:

• A transfer of legal ownership to you at the end of the lease term
• An option allowing you to purchase the asset at a discounted price at the end of the lease term
• The lease term equals at least 75% of the estimated economic life of the equipment, or
• The discounted lease payments are equal to at least 90% of the fair market value of the equipment

A Capital Lease could be your best option if you are interested in retaining ownership of the equipment once the lease ends. This type of lease allows you to create a purchase option without making a large initial investment in the equipment you need.

With an Operating Lease, you lease the equipment you need for a shorter period of time than the expected life of the asset. Since you lease the equipment for only a fraction of its useful life, you can often benefit from additional services, such as maintenance and insurance, provided by the equipment vendor. Because an Operating Lease does not qualify as a Capital Lease, you account for it as a rental expense.

An Operating Lease is your best option for short-term equipment needs.

A Terminal Rental Adjustment Clause, or TRAC, Lease allows you flexible payment options that are determined by the residual purchase price you establish at the start of the lease. Depending on how you wish to spread out your costs, you can either choose higher monthly payments with a lower end-of-term residual purchase price, or lower monthly payments with a higher end-of-term residual purchase price.

With this type of lease, you have several options at the end of the lease term. You may:

• Purchase the equipment for the established residual amount
• Trade in and replace the equipment, applying any equity to the new equipment
• Extend the lease by financing the residual amount, or
• Return the equipment and receive a rental adjustment that is based on the resale value of the equipment compared to the residual purchase price

This type of lease could be your best option if you want to better manage your cash flow through payment flexibility. A TRAC lease lets you combine the advantages of leasing with the option of an end-of-term purchase price set when the lease term began.