A large sector of the transportation industry, among others, is now benefiting from a special type of capital equipment lease known as a TRAC lease. Also known as a terminal rental adjustment clause lease, it is an affordable way for a business whose primary interest is the leasing of vehicles for business purposes to finance the eventual ownership of those vehicles in a more convenient and affordable way.
What is the purpose of such a lease?
Instead of going through the hassle of obtaining financing for each truck, car, or trailer as needed, a business owner can negotiate a TRAC lease for the purpose of renting the vehicle for a predetermined period of time and then purchasing it at the end. or in the terminal by has agreed the price. This allows them to pay monthly rental fees for the use of the vehicle and then pay a fixed price at the end for the entire ownership.
Negotiated payment amounts are more flexible than in other leases, as they can be adjusted over the term of the lease. Seasonal commercial operators can pay for the vehicle rental with larger seasonal payments, for example, based on their cash flow options at the time. However, year-round operators can pay adjustable monthly rental payments and even tiered payments to speed up the lease if they choose. All of this gives them the use of the vehicle, without having to make a large down payment or pay a large amount of financing fees, such as interest, for the entire lease period.
What happens when the lease ends?
When this lease begins, the fixed price per vehicle is negotiated and it is agreed that the leasing agent will be paid in full when the lease ends. This price is usually a percentage of the fair market value of the vehicle at the beginning of the lease and will not change when the lease expires. Once paid, full ownership rights are transferred and the business owner can now claim all the tax benefits from the vehicle purchase.
If the business owner chooses not to purchase the vehicle at the agreed price at the end of the lease, the leasing agent reserves the right to sell that vehicle directly to another party, if possible.
If the final sale price is less than the agreed value for the business owner, then the business owner must make up the difference with the leasing agent, as the leasing agent was legally obligated to accept that price from them. at the end of the lease. .
If the sale is made for a value greater than the negotiated price to the business owner, then the business owner is owed a refund of the equivalent rental payments that they had paid during the term of the lease.
Fiscal benefits
The IRS considers a TRAC lease to be a true tax-oriented lease. At the time of ownership, a business owner can claim full depreciation of the vehicle, as well as any rental payments before ownership that would be allowed. Tax reform programs led to the creation of this type of lease so that commercial trucking companies could continue to keep newer and better trucks on the road and allow expenses to depreciate as if the truck was owned from the start. This is yet another reason why this method is a much more affordable way to finance capital purchases in a tough economy.