What Are the Criteria for a Capital Lease?

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What Are the Criteria for a Capital Lease?

Capital Lease

What are the Criteria for a Capital Lease?

If your business is considering a considerable purchase of business equipment, it’s important to weigh your financing options before making the actual acquisition. There are alternatives to dedicating your cash resources to such purchases, including dealer financing and capital leases or operating leases.

Capital leases can be the best option if the right criteria are met for such financing, including any one of the following:

  • Your business will own the property or leased equipment by the end of the lease period.
  • You have the right to purchase the equipment at the end of the lease term at a price below market value. (Referred to as the “bargain purchase option”)
  • Your lease period extends through at least 75% of the asset’s life expectancy, and the lease cannot be cancelled during that period
  • The present value of your lease’s minimum payments required amounts to at least 90% of the fair market value when the lease is initiated.

 

How Does a Capital Lease Work?

With a capital lease, the lessee retains the leased property as an asset on their general ledger, and is therefore also responsible for such expenses as insurance, taxes, and maintenance. Also, since the property covered on the capital lease becomes a lessee asset, depreciation expense applies. As the owner of equipment financed under a capital lease, you can only deduct the interest portion of the lease payments as expense.

Your ability to deduct depreciation and interest expense can have definite tax implications, making consideration of multiple financing options well worth investigating for impact to your business’ bottom line before making financing decisions.

From an accounting standpoint, your liability for a capital lease is an entry on your balance sheet, which some investors or financial analysts may view negatively.

You will also want to have a strong level of confidence that the property will still have use at that point, or will at least have value equivalent with your final purchase expense. Otherwise, you may be left purchasing equipment that has either less value (or no value) than your purchase cost, or it may be obsolete and of no further use to your company.

 

Equipment Financing Options can be Complex and Confusing

Before proceeding with the acquisition of business equipment or any significant capital expenditure, it is wise to consult with experts in various financing methods and terms, including a qualified tax advisor.

Integrity Financial Groups fully understands the variety of financing options available for purchasing business equipment including trucks, heavy equipment, and other vehicles – new or used. We have financing expertise that gives our customers the best options and financial alternatives that contribute to the bottom line while also considering tax advantages and accounting implications. Contact us today to discuss capital leasing options customized to meet your business needs.