Office & Operations mentor Mie-Yun Lee responds:
Before signing any lease, you'll want to think carefully about which type of lease is best for you. Usually, when leasing office equipment, manufacturers or finance companies don't refer to their leasing option plans by any industry-standard names, so you'll have to carefully read the description of each lease to know exactly what you are getting into.
Basically, there are two types of leases: finance and true. The one that you pick will primarily depend upon what you expect to do with the equipment once the lease has expired.
Finance leases, also known as capital leases or conditional sales, work best for companies that intend to keep the equipment at the end of the lease. The main advantage to this type of lease is that it gives you the option to purchase the equipment for a nominal fee, sometimes $1. Payments on finance leases generally represent the full value of the equipment. A finance lease can be a good option if you'd rather not tie up large amounts of cash.
True lease (also known as tax lease) payments, on the other hand, do not cover the full value of the equipment. At the end of the lease, you can choose to walk away from the equipment or purchase it at fair market value, which for office equipment usually translates to at least 10% of the original purchase price.
A true lease can let you fully claim lease payments for tax purposes while a finance lease can be regarded as an installment purchase plan and enables you to claim depreciation and write off finance charges based on ownership of the equipment. Before you sign any lease, make sure to discuss the tax implications with your accountant. The IRS has numerous exceptions for various styles of leasing that only a tax expert would know.
In addition, use vigilance when reading the fine print. Ask the lessor to explain any clauses that have sketchy wording. Check the contract to find out what penalties are incurred for making late payments or defaulting on a lease, or to see if there are any hidden fees. Since a lease is essentially a loan, you may have to pay a loan origination fee that could be around 4 to 5% of the cost of each system. Make sure that the end-of-lease terms and purchase price are in writing. Otherwise, you may find yourself at the end of your lease not being able to prove, for example, that you are entitled to a dollar buyout.
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