True or Tax Lease
A true lease is also known as a tax lease or a tax-oriented lease. It is referred to as true because this type of contract passes the accounting requirements for the lessor to claim any and all associated tax benefits, including depreciation deductions, an the leased property or equipment.
Simply speaking, a tax lease is any lease in which the lessor-the financier-is considered the owner of the leased equipment for federal income tax purposes. With a non-tax lease, the lessee-the business that received financing and is probably using the equipment-is considered the owner for tax purposes.
A sale leaseback is an arrangement in which the company that sells an asset can lease back that same asset from the purchaser. With a sale-leaseback—the details of the arrangement, such as the lease payments and lease duration, are made immediately after the sale of an asset. In a sale-leaseback transaction, the seller of the asset becomes the lessee, and the purchaser becomes the lessor.
In a sale-leaseback agreement with LeaseSouth, an asset that is previously owned by the seller is sold to LeaseSouth and then leased back to the first owner for a determined number of months. In this way, a business owner can continue to use a vital asset but ceases to own it.
Benefits to Seller/Lessee…
- Can provide additional tax deductions
- Enables a company to expand its business
- Can help to improve the balance sheet
- Limits volatility risks of owning the asset
- Increases working capital
Municipal Lease Purchase agreements are basically structured as an installment sales contract. Lease terms can vary from two to fifteen years. Payments may be made monthly, quarterly, semi-annually, or annually. The lessor or investor in a Municipal Lease purchase is tax exempt on the income received from this type of financing. LeaseSouth, LLC. passes this tax savings on to the lessee in the form of lower interest rates.
Section 103 of the Internal Revenue Code of 1986 specifies that any state, territory, or possession of the United States, or their political subdivisions, can qualify to take advantage of tax-exempt financing. This includes:
- State governments & agencies
- County governments & agencies
- City government & agencies
- Other public entities funded by state or local taxes
An operating lease is a lease whose term is short compared to the useful life of the equipment being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis. Operating Leases are considered a form of off – balance sheet financing – meaning a leased asset and associated liabilities are not included on the company’s balance sheet.
1) An operating lease is a contract that permits the use of an asset but does not convey ownership
rights of the asset.
2) GAAP rules govern accounting for operating leases.