What types of leases are there?
There are many types of leases and various descriptions of them, some of which are/aren't recognizable and utilized on a day-to-day basis. Below outlines the most common leases you're likely to encounter:
- Capital Lease - A capital lease is used when you want equipment costs fixed at end of the lease (usually has a $1 purchase option). This type of lease must be disclosed as an asset and related obligation on the balance sheet. From a financial reporting perspective, a capital lease has the characteristics of a purchase agreement, is usually "on the balance sheet," and usually does not allow as favorable a financial statement presentation when seeking bank credit as does a True Lease.
- Commercial Lease - When you enter into the lease transaction for business or commercial purposes, the agreement is known as a commercial lease.
- Consumer Lease - When a lessee enters a lease transaction for personal, family or household purposes, the agreement is known as a consumer lease. MKL Funding does not provide consumer leases.
- Finance Lease - A finance lease is a general term applied to most types of equipment leases. Typically, a finance lease is a full-payout, non-cancelable agreement, and the lessee is responsible for maintenance, taxes, and insurance.
- Gross Lease - A gross lease describes a transaction in which a lessee would be liable for insurance, property taxes, maintenance expenses, and the like.
- Maintenance Lease - A maintenance lease describes a transaction in which you would have an obligation to keep the equipment in good working order.
- Net Lease - A net lease describes a transaction where installments paid to the lessor do not include insurance, taxes and maintenance, which are paid separately by the lessee.
- Operating Lease - For accounting purposes, an operating lease is any lease that is not a capital lease; hence, is not required to be shown on the lessee's balance sheet. These have the characteristics of a usage (rental) agreement and are generally used for short-term leases of equipment. The lessee can acquire the use of equipment for just a fraction of the useful life of the asset.
- Service Lease - A service lease describes one in which the lessor provides complete service, maintenance, and care for the leased equipment.
- True Lease - A True Lease allows the Lessee to expense lease payments, thereby reducing tax liability. Companies may use the True Lease when trying to acquire the use of equipment under an operating budget or when trying to limit alternative minimum tax liability or simply to control tax liability. The True Lease is also usually accounted for "off balance sheet" in the financial statements. If the Lessee chooses to purchase the equipment at the end of a lease, he may then capitalize the purchase and take further deductions.