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TRAC Leases 
   

An Open End Lease can be structured as a "true tax lease" and the payments treated as an operating expense like a rental.  Up to 100% of the "rent" payment may be deductible for federal income tax purposes.

  

An Open End Lease can also be structured as a "finance lease" and treated as a loan for tax purposes with purchase options as low as $1.00.  Lessees takes depreciation instead of writing off payments as an operating expense.
   
Open End Leases don't have the penalties associated with other leases:

  • NO Mileage Limits or Charges
  • NO Body Damage Charges

What's a TRAC Lease?
A TRAC Lease is an Open End Lease available only for vehicles and trailers used at least 50% of the time for business purposes. The lease document must have a          Terminal Rental Adjustment Clause to qualify.

TRAC Leases are unique in that federal tax rules permit a cash rebate (Rental

Adjustment) back to the lessee at lease termination if turned in and sold by the lessor.

  

How TRAC Leases work: 
At the beginning of the lease a Residual Amount is chosen that will be used to determine monthly payments and may also be the purchase price at lease end.  The residual should be at least 10% of the amount financed.

 - Higher Residual Amounts = lower monthly payments = higher purchase options
 - Lower Residual Amounts = higher monthly payments = lower purchase options

 

At the end of a TRAC Lease you have choices:
  • Purchase the vehicle for the Residual Amount
  • Trade in for a replacement vehicle and apply any equity to the new vehicle
  • Extend the lease by financing the Residual Amount.
  • Turn in the vehicle and be eligible for the Rental Adjustment "cash rebate"

   

Example of a TRAC Lease Cash Rebate at Lease End 
Original Cost Of Vehicle:  $ 25000  
Residual Amount:   $ 5000  
End of Term Sale Proceeds:   $ 6000  
Cash back to lessee: $ 1000  

   
The lessee is responsible for any deficiencies.
  

This information is based on accepted accounting principles and interpretations.  It is intended to help you understand Commercial Leases.  This is not to be considered tax or legal advice.  Always consult with a qualified tax or legal advisor regarding any aspect of the federal tax code.        

   
 
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