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There is a general misconception that • True lease — A lease that entitles the
companies that utilize financing cannot afford lessor to qualify for the tax benefits of owner-
to buy equipment. Approximately 80% of U.S. ship and the lessee to claim the entire amount
companies finance equipment. Every year, of the lease rental as a tax deduction. A true
American businesses, nonprofits and govern- lease, also known as an operating lease or fair
ment agencies invest over $1.6 trillion in capital market value lease, affords the lessee greater
goods and software. Some 60%, or $1 trillion, is flexibility at the end of the term, which may
financed through loans, leases and other finan- include returning the equipment to the lessor,
cial instruments. continuing to finance the equipment or pur-
Some of the different types of equip- chasing the equipment. There are net after-tax
ment financing methods that companies typi- advantages and no increase in current company
cally utilize include loans, leases and rentals. liabilities.
A loan is a form of debt where one • TRAC lease — A lease on a qualified
party (lender) agrees to lend money, usually automobile, truck or trailer that guarantees the
for collateral, that is given to another party residual value. A TRAC lease affords the lessee
(borrower) in exchange for future repayment of the tax advantages of a true lease but guaran-
the loan value, plus interest and other finance tees the residual value at the end of the term.
charges. A loan can be for a specific, one-time • Rental agreement — A short service
amount, or it may be available as an open-end- lease, usually less than 12 months in dura-
ed line of credit up to a specific limit. Loans tion. Rental agreements are utilized typically
come in different forms like personal, commer- in short-term finance situations, or in a rental
cial, secured and unsecured loans. Loans are with purchase option (RPO) scenario. Rentals
useful when a company wants to retain owner- are typically offered by equipment manufactur-
ship of the asset or is seeking an open-ended ers but can also be documented by the lender.
line of credit. Loans can have floating or fixed To determine which equipment finance
rates, are typically utilized for assets that have option is most suitable for your business, you
a long, useful life and are most often structured should consider the following:
with a down payment.
• Cash flow — What are your cash flow
A lease is a transaction in which use and needs? Propane companies generally have
possession of, but not title to, tangible property higher revenue in the winter months. Often,
is transferred for consideration. In a lease struc- seasonal payments can offer more flexibility
ture, the lender (lessor) owns the equipment and meet fluctuating cash flow needs. Perhaps
and contracts with the borrower (lessee) for its you are installing several 500- and 1,000-gallon
possession and use over an extended period. tanks at customer locations, but may not recog-
There are several different types of leases: nize revenue until installation is complete, tanks
• Capital lease — A lease that has the are filled and customers have been billed. Step
characteristics of a loan and is required to be payments with lower monthly amounts due for
shown as an asset and related obligation on the first several payments may be beneficial.
the balance sheet. Capital leases can be utilized Leases tend to have more payment flexibility
in the same way as loans from an accounting than loans.
perspective. The borrower (lessee) owns the • Tax and accounting needs — Do you
equipment at the end of the term and can want to own and depreciate the asset and
depreciate the value of the asset. Capital leases show this as an obligation on your balance
offer more flexibility in monthly payments and sheet? If so, a capital lease or loan would be
often do not require a down payment.
19 Alabama Propane Gas Association | July / August 2023
