Glossary
Acceptance Certificate
(often referred to as Delivery and Acceptance Certificate) A document whereby the lessee acknowledges that the equipment has been delivered, installed correctly, is acceptable, and has been manufactured or constructed according to specifications.
Assignment
Lease agreements generally contain a provision permitting the Lessor, or other type of Lender, to transfer the Lease to another party by "Assignment". Assigning the lease does not affect the terms and conditions of the lease itself.
Capital Lease
The term "capital lease" is a FASB (accounting) classification. A lease is classified as a capital lease when the risks and benefits of ownership are transferred from the lessor to the lessee. With a capital lease, lessees must treat the lease transaction as if the asset was purchased. A capital lease does not qualify as a True Lease for tax purposes or an Operating Lease as defined by FASB 13 accounting standards.
Economic Life
Estimated period of time during which an asset will have economic value and be useable for a business.
Fair Market Value Lease
A lease where the lessee has the option at lease end to purchase the equipment at fair market value, renew the lease, or return the equipment to the lessor. An FMV lease provides tax advantages because the lessee can fully claim the lease payments as a business expense. From an accounting perspective, a FMV lease generally qualifies as an operating lease.
Lease
A legal contract where the owner (lessor) gives another party (lessee) the right to use a piece of equipment for a specified time in exchange for periodic payments.
Lessee
The equipment user.
Lessor
The equipment owner.
Non Tax Lease
The term "Non Tax Lease" is an Internal Revenue Service classification. The IRS treats the lease as if it were a purchase or loan for tax purposes. The lessee receives the same tax benefits as ownership. That means a customer is entitled to claim depreciation and interest expense deductions in lieu of claiming the lease payment as an operating expense deduction.
Operating Lease (FASB 13)
The term "operating lease" is a FASB classification. The lease is accounted for as a pure rental. The equipment is neither shown as a liability nor an asset on the lessee's business balance sheet.
Purchase Option
A provision that allows the lessee to purchase the equipment at the end of the lease. The purchase price may be stated as a specific amount or at fair market value.
Residual Value
The value of an asset at the end of a lease.
Sale-Leaseback
A lessor buys equipment from a business and immediately releases the equipment back to the business. This provides a cash flow boost to the business, but allows the business to continue to use the equipment. In turn, the lessor receives lease payments on the equipment.
True Tax Lease
The term "true tax lease" is an Internal Revenue Service classification. The lessor is the owner of the equipment for federal income tax purposes. The lessor receives the right to the tax benefits of ownership, including depreciation and any tax credits. The lessee receives a tax benefit by being allowed to claim the lease payment as as operating expense thus lowering businesses taxable income.
TRAC Lease
A TRAC lease is designed for commercial vehicles and trailers. At the end of the term, the vehicle may be purchased for the remaining book value. If is it sold to a third party for more than the remaining book value, the excess proceeds go to the lessee. If it is sold for less than the remaining book value, the lessee must pay the difference to the lessor. This "adjustment clause" allows the lessee to fully claim the lease payment as a business expense.
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