One question we’re asked over and over again here at Point Blank is “What is the difference between a Fair Market Value Lease and a Capital Lease?” Well, luckily Direct Capital is here to clear the air.
They’re kind of the step-siblings of the finance world – part of the same family, but it’s easy to see some dramatic differences. For starters, a Capital Lease (sometimes called a Finance, Nominal, Buck-Out or Dollar-Buyout Lease) provides a fixed monthly payment during the life of lease. The most distinguishing feature, however, is the option to purchase the equipment for a nominal price at the end of the term – sometimes for as little as a dollar. The whole “Dollar-Buyout” nickname is making more sense now, isn’t it?
A Fair Market Value lease (sometimes called a True Lease or an Operating Lease) generally has lower monthly payments than a Capital Lease or a bank loan and it’s most often used as a shorter-term lease than a Capital Lease. It’s usually best used for purchases of equipment that is high-tech or fast-changing like software or computer equipment. At the end of the term, the lessee most often returns the equipment to the lessor or in some cases is granted the option to purchase the equipment at “fair market value.”
There are some distinct differences at tax time too – this is where a Fair Market Value lease tends to shine. The FMV lease payments are 100% tax deductible as an operating expense, since the equipment is not seen as a purchase. AND, neither the asset nor the liability needs to appear of the company’s balance sheet. A Capital Lease, on the other hand is seen as a purchase, where the lessee is considered to be the owner of the equipment and maintains full control over the residual value. So, the monthly payments are generally slightly higher since you’re paying for 100% of the equipment cost. Though the payments can’t be deducted as an operating expense, the lessee does have the ability to record the equipment as an asset on their balance sheet.
What it comes down to is this: Each type of lease may be better served for different companies and different situations. It’s important to have a handle on your budget, timeframe, and future equipment needs before you sign a lease. Be sure to talk to your finance provider to get the low down on which type lease might be best suited for your needs. As always, Direct Capital’s finance managers are here to help!
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