Types of Equipment Leases

Capital Lease: This type of lease is similar to a loan in that it allows you to consider the equipment as an asset on your balance sheet. This benefits your company because you can claim tax depreciation. With ownership, you incur the risk of the equipment becoming obsolete. A capital lease is usually good for you if you are considering a long-term use of the equipment. The lease can be as long as five years.

A lease is considered a capital lease if it meets any of the following criteria:

• The ownership of the equipment is transferred to the lessee at the end of the lease term.
• The lessee has an option to purchase the equipment at the end of the term.
• The term of the lease is equal to at least 75% of the economic life of the property, except when the equipment is leased at the end of its economic life.
• The minimum lease payment is equal to at least 90% of the market value of the equipment, minus tax credits.

If your lease has a “buyout” option, you can have either a Fair Market Value (FMV) or a $1 buyout option.

• The FMV option allows buying the equipment at the end of the lease for its current market value.
• The $1 option allows buying the equipment for $1 at the end of the lease. However, the monthly payments are usually higher than the FMV option.

Operating Lease: If you choose this type of lease, the leasing company keeps ownership of the equipment, and you will deduct the cost of the lease from your company’s taxes as a monthly expense. Small companies prefer this lease because they are short-term (three years or less), do not tie up funds, and allow for the use of the latest equipment. The lessor provides maintenance for the equipment.

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