|
||||
|
|
||||
|
|
Learn Introduction to Leasing at The Leasing Academy A lease is a contract in which a customer (lessee) pays a monthly, quarterly, semi-annual or annual rent to an owner (lessor) for the right to use equipment (airplane, computer, barge) for a specific amount of time (i.e. 60 months. Although leasing began in 2010 B.C.,modern leasing began in the early fifties. The creation of the Investment Tax Credit in 1962 spurred additional growth through "tax-oriented" leasing. New products were quickly developed to meet the growing demand. Over the last 50 years, many leasing companies developed non-tax oriented products such as income funds, operating leases, limited partnerships, vendor programs, and residual sharings in order to remain competitive. Equipment leasing blossomed over the last 20 years due to:
Cash flow - monthly payments are generally smaller for leases than for loans and they usually require a smaller or no downpayment. Use vs. ownership - many businesses have discovered they don't need to own the equipment they use. In the past renting and leasing were frowned upon. Today's psychology looks more to the economics rather than the moralities of ownership. Tax benefits - Depreciation and interest on debt produce potential tax benefits. Better-looking financial statements - certain leases provide the user with "off-balance sheet" accounting treatment. Leasing is governed by the Financial Accounting Standards Board (FASB), and the Internal Revenue Service (IRS) and the Uniform Commercial Code (UCC). Please see various articles on FASB, IRS and the UCC Confusion arises when these regulatory bodies do not agree. Since lease contracts are fairly complicated, regulatory bodies must decide whether the language of the contract governs the transaction or whether the intention of the parties should be followed. The following highlights the major differences between FASB and IRS. Basically, ownership interest is transferred to the lessee when: FASB
IRS
Ownership interest remains with the lessor only if none of these criteria are met. Because the criteria differ somewhat, ownership interest may transfer to the lessee according to one authority and remain with the lessor according to the other. As far as state and local taxing authorities are concerned, ownership resides with the lessor unless title has been explicitly transferred. This usually makes the lessor responsible for remitting sales and personal property taxes as well as billing the lessee. In general, there are two major lease types, capital leases and operating leases. Until 1986, both types of leases were very popular leasing products for the equipment leasing industry. However, the 1986 Tax Reform Act, which strongly deemphasized federal tax benefits and lowered corporate tax rates, discouraged the use of capital leases and encouraged the use of operating leases. A capital lease typically transfers ownership of the equipment from the lessor to the lessee at the end of the lease. Whereas, in an operating lease the lessee returns the equipment to the lessor at the end of the lease without any further obligation.
|
|
||