Synthetic Leasing

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Synthetic Leasing

Synthetic leasing is very similar to an operating lease. This type of equipment lease allows you to enjoy the tax benefits associated with owning the equipment, but still avoid actually dealing with the burdens of ownership. Because a synthetic lease is so sensitive, it is important that it is properly structured so that you are doing everything in accordance with the law.

Synethic Leasing Qualifications

In order for a lease to qualify as synthetic, it must meet all of these four criteria:

1. There should be no transfer of ownership of the property when the lease expires. This means that, even though you can renew the lease, or you can get an equipment upgrade, you never actually have ownership. The leasing company retains all ownership of the equipment.
2. A synthetic equipment lease should not include an option to purchase at a bargain price. It is possible to purchase at fair market value at the end of the lease, but this option to purchase cannot be part of the lease agreement itself.
3. The equipment lease must contain a non-cancelable period. This is a period of time in which it is not permitted for the lease to be cancelled. The non-cancelable period must ensure that at least 75 percent of the estimated value of the property will be paid before the lease can be cancelled.
4. The lease payments made on the equipment must be such that they would result in paying at least 90 percent of the equipment's fair market value.

Synthetic equipment leases also carry with them some interesting tax advantages. For purposes of ownership in a tax sense, a synthetic lease carries with it all of the benefits. The business owner gets to use the equipment, and has ownership burdens placed upon him or her (the non-cancelable period and requirement of paying at least 90 percent of the fair market value) make it possible to enjoy interest deductions from lease payments (if the lease is one that charges interest) and to make the business eligible for accelerated depreciation.

Considering a Synthetic Lease

Before you decide on a synthetic lease, however, you should take some things into account. You want to make sure that this lease option (or any lease option for that matter) is the right choice for your company. If the value of the equipment you are planning to buy will appreciate in value, such a lease might be a good idea. Even if the equipment will not appreciate in value, there are other considerations that outweigh this. If you are tying up cash in equipment, and it is preventing other aspects of the business from reaching their goals, you might consider a lease agreement on some equipment to free up the cash. Additionally, a synthetic lease is a way to achieve 100 percent financing. If you feel that 100 percent financing will help you grow your business more rapidly, and with greater cost efficiency, the synthetic equipment lease is worth considering.

A synthetic lease can help you achieve faster growth, and provide you with some valuable tax benefits. When deciding how your company should acquire equipment, a synthetic lease should be part of the discussion.

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