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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 $2 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 $2
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 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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