First, a review of Open End Leases:
Open End Leases can be structured as a "true tax lease" (operating lease) and the payments can be expensed up to 100% and treated as "rent" payments for federal income tax purposes.
Open End Leases can also be structured as a "finance lease" (capital lease) and treated as a loan for tax purposes with a bargain purchase option as low as $1.00. The lessee takes depreciation instead of writing off payments as "rent".
Open End Leases have none of the penalties associated with other leases.
|NO Mileage Limits or Charges
||NO Body Damage Charges
|NO Sign or Lettering Restrictions
||NO Paint Scheme Restrictions
Open End Leases containing a Terminal Rental Adjustment Clause are known as TRAC Leases. TRAC Leases are limited to motor vehicles and trailers used at least 50% of the time for business purposes.
TRAC Leases are unique in that federal tax rules permit a Rental Adjustment (cash rebate) back to the lessee at lease termination and still be treated as a "true tax lease".
How TRAC Leases work:
At the beginning of the lease a Residual Amount is chosen that will be used to determine monthly payments.
- Higher Residual Amounts = lower monthly payments = higher purchase options
- Lower Residual Amounts = higher monthly payments = lower purchase options
At the end of a TRAC Lease you have 4 choices:
1. Purchase the vehicle for the Residual Amount.
2. Trade-in for a replacement vehicle. Apply any equity to the new vehicle.
3. Extend the lease by financing the Residual Amount.
4. Turn in the vehicle and be eligible for a Rental Adjustment based on the lessor's sale proceeds over the Residual Amount. If the vehicle sells for less than the Residual Amount you are responsible for the deficiency... purchase the vehicle for the Residual Amount and there is no further obligation on your part.
Example of a TRAC Lease Cash Rebate at Lease End
|Original Cost Of Vehicle:
|End of Term Sale Proceeds:
|Terminal Rental Adjustment:
||$1,000 Cash back to lessee.
This information is based on accepted accounting principles and interpretations. It is intended to help you understand Commercial Leases. This is not to be considered tax or legal advice. Always consult with a qualified tax or legal advisor regarding any aspect of the federal tax code.