Glossary

 

 
 

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V |W | X | Y | Z

 

 

A

ACCELERATED COST RECOVERY SYSTEM (ACRS) (Modified)

The Tax Reform Act of 1986 established the modified ACRS tax appreciation system prescribing depreciation methods for each ACRS class in lieu of statutory tables. Equipment is assigned among 3, 5, 7, 10,15, or 20-year classes depending on ADR lives.

ALTERNATIVE MINIMUM TAX (AMT)

An alternative, separate tax calculation based on the taxpayer's regular taxable income, increased by the taxpayer's preferences for the year. The resulting amount is called the alternative minimum taxable income (AMTI). After certain exemptions and offsets, the taxpayer determines its AMT and is required to pay the larger of the regular tax or alternative minimum tax. Among the preferences that can increase the taxpayer's AMTI is the accelerated portion of depreciation, thereby making it more likely that a taxpayer that buys equipment may be subject to the AMT rather than to regular tax.


B

BARGAIN PURCHASE OPTION

A lease provision allowing the lessee, at its option, to purchase the equipment for a price predetermined at lease inception, that is substantially lower than the expected fair market value at the date the option can be exercised.

BASIS POINT

A basis point is a unit of measurement equal to 1/100th of a percent.

BUYOUT

This term indicates the amount a customer leasing the equipment must pay in order to terminate the lease in advance of the expiration date. This amount is calculated to include recapture of taxes paid, unpaid property taxes, and lost revenues.


C

CAPITAL LEASE

Type of lease classified and accounted for by a lessee as a purchase and by the lessor as a sale or financing, if it meets any one of the following criteria: (a) the lessor transfers ownership to the lessee at the end of the lease term; (b) the lease contains an option to purchase the asset at a bargain price; (c) the lease term is equal to 75 percent or more of the estimated economic life of the property (exceptions for used property leased toward the end of its useful life); or (d) the present value of minimum lease rental payments is equal to 90 percent or more of the fair market value of the leased asset less related investment tax credits retained by the lessor. (Also see finance lease.)

CASUALTY VALUE

A schedule included in a lease that states the agreed value of equipment at various times during the term of the lease and establishes the liability of the lessee to the lessor in the event that the leased equipment is lost or rendered unusable during the lease term due to a casualty loss.

CERTIFICATE (DELIVERY AND ACCEPTANCE)

A document whereby the lessee acknowledges that the equipment to be leased has been delivered, is acceptable, and has been manufactured or constructed according to specifications.

CONDITIONAL SALE

A situation under the income tax provisions whereby the actual user is seen as the owner of an asset for availing the capital allowances.

COTERMINOUS

This term refers to two or more leases that are linked so that both will terminate on the same date.


D

DEPRECIATION

Depreciation is a tax deduction representing a reasonable allowance for exhaustion, wear and tear, and obsolescence. This type of deduction is claimed by the owner of the equipment so that the cost of the equipment can be allocated over a longer period of time. Depreciation lowers the company's balance sheet assets and also is recorded as an operating expense over that extended period.

DIRECT FINANCING LEASE (Direct Lease)

A non-leveraged lease by a lessor (not a manufacturer or dealer) in which the lease meets any of the definitional criteria of a capital lease, plus certain additional criteria.


E

ECONOMIC LIFE (Useful Life)

The period of time during which an asset will have economic value.

EFFECTIVE LEASE RATE

The effective rate (to the lessee) of cash flows resulting from a lease transaction. To compare this rate with a loan interest rate, a company must include in the cash flows any effect the transactions have on federal tax liabilities.

EQUITY PARTICIPANT

The owner participant of the lease.

EQUIPMENT SCHEDULE

A document that describes in detail the equipment being leased. It will also state the lease term, lease payment and location of the equipment.


F

FAIR MARKET PURCHASE OPTION

An option to purchase equipment at the end of the lease term at its then fair market value.

FIRST AMENDMENT LEASE

The first amendment lease gives the lessee a purchase option at one or more defined points with a requirement that the lessee renew or continue the lease if the purchase option is not exercised. The option price is usually either a fixed price intended to approximate fair market value or is defined as fair market value determined by lessee appraisal and subject to a floor to insure that the lessor's residual position will be covered if the purchase option is exercised.

If the purchase option is not exercised, then the lease is automatically renewed for a fixed term (typically 12 or 24 months) at a fixed rental intended to approximate fair rental value, which will further reduce the lessor's end-of-term residual position. The lessee is not permitted to return the equipment on the option exercise date. If the lease is automatically renewed, then at the expiration of that initial renewal term, the lessee typically has the right either to return the equipment without penalty or to renew or purchase at fair market value.

FINANCE LEASE

Typically, a finance lease is a full-payout, noncancellable agreement, in which the lessee is responsible for maintenance, taxes, and insurance.

FIXED PURCHASE OPTION

This is an option that allows the customer to purchase the equipment at the end of the lease term for a fixed percent of the original purchase cost. A typical fixed purchase option is 10% of the original purchase cost.


I

INDEMNITY CLAUSE

A clause in which the lessee indemnifies the lessor from loss of tax benefits.


L

LARGE ASSET

A market segment, generally dominated by leveraged leases, represented by lease financing over $3 million.

LEASE

A contract in which one party conveys the use of an asset to another party for a specific period of time at a predetermined rate.

LEASE RATE (Rental Payment)

The periodic rental payment to a lessor for the use of assets.

LESSEE

The user of the equipment being leased.

LESSOR

The party to a lease agreement who has legal or tax title to the equipment, grants the lessee the right to use the equipment for the lease term, and is entitled to the rentals.

LEVERAGED LEASE

In this type of lease, the lessor provides an equity portion of the equipment cost and lenders provide the balance on a nonrecourse debt basis. The lessor receives the tax benefits of ownership. The lessee receives the benefit of a lower lease payment.


M

MASTER LEASE

A contract where the lessee leases currently needed assets and is able to acquire other assets under the same basic terms and conditions without negotiating a new contract.

MIDDLE MARKET

A market segment generally represented by financing under $3 million and dominated by single investor leases.


N

NET LEASE

A lease wherein payments to the lessor do not include insurance and maintenance, which are paid separately by the lessee.


O

OFF-BALANCE-SHEET FINANCING

This term refers to a leasing arrangement that qualifies as an operating lease for the financial accounting purposes of the person or company leasing the equipment. Such leases are described as 'off-balance-sheet financing' because they're not included in the traditional balance sheet asset and debt presentation—except for that portion of each payment that is due in the current fiscal period. Full disclosure of these transactions typically is provided in an auditor's notes on financial statements. Periodic payments are recorded as expense items on the income statement of the person or company leasing the equipment.

OPERATING LEASE

Any lease that is not a capital lease. These are generally used for shorter term leases of equipment. The lessee can acquire the use of equipment at significant savings.


P

PAYMENT IN ADVANCE

This term refers to the periodic payments due at the beginning of each period.

PAYMENT IN ARREARS

This term refers to the periodic payments due at the end of each period.

PRESENT VALUE

The current equivalent of payments or a stream of payments to be received at various times in the future. The present value will vary with the discount interest factor applied to future payments.

PURCHASE OPTION

A provision by which a lessee has the right to purchase the equipment at the end of the lease. The purchase option may be stated at fair market value.


R

RESIDUAL VALUE

The anticipated value of an asset at the conclusion of a lease.


S

SALE-LEASEBACK

An arrangement whereby equipment is purchased by a lessor from the company owning and using it. The lessor then becomes the owner and leases it back to the seller, who continues to use the equipment.

SINGLE INVESTOR LEASE

A tax-oriented lease whereby the lessor achieves its desired rate of return via a combination of the rental payments, depreciation, and the fair market value of the equipment at the end of the original lease term. Because of the value of the tax benefit, the rental payments may be lower than for a finance lease.

SKIP-PAYMENT LEASE

This type of lease contains a payment stream requiring the company leasing the equipment to make payments only during certain periods of the year.

SMALL-TICKET LEASING

Transactions under $100,000, typically using conditional sale leases or single investor true leases.

STEP-UP OF STEP-DOWN

A lease feature that provides for a payment stream where individual payments may increase (step-up) or decrease (step-down) over the term of the lease.

SYNTHETIC LEASE

A synthetic lease is basically a financing structured to be treated as a lease for accounting purposes, but as a loan for tax purposes. The structure is used by corporations that are seeking off-balance sheet reporting of their asset based financing, and that can efficiently use the tax benefits of owning the financed asset.


T

TAX LEASE

A lease wherein the lessor recognizes the tax incentives provided by the tax laws for investment and ownership of equipment. Generally, the lease rate factor on tax leases is reduced to reflect the lessor's recognition of this tax incentive.

TRAC LEASE

A tax-oriented lease of motor vehicles or trailers that contains a terminal rental adjustment clause and otherwise complies with the requirements of the tax laws.

TRUE LEASE

A type of transaction that qualifies as a lease under the Internal Revenue Code. It allows the lessor to claim ownership and the lessee to claim rental payments as tax deductions.


V

VENDOR LEASING

A working relationship between a financing source and a vendor to provide financing to stimulate the vendor's sales. The financing source offers leases or conditional sales contracts to the vendor's customers. The vendor leasing firm substitutes as the captive finance company of a manufacturer or distributor through the extension of leasing to customers, provisions of credit checking, and performance of collections and operational administration. Also known as lease asset servicing or vendor program.


 

 

 

 

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