Merrimak Capital Company is an independent, full service provider of flexible financing solutions for business equipment leasing that can help your organization manage assets more effectively. Learn more about equipment leasing terminology with this glossary.

ALTERNATIVE MINIMUM TAX

By treating a lease as an operating lease for federal income tax purposes, a lessee can reduce its exposure to alternative minimum tax. The alternative minimum tax is computed by determining a taxpayer's AMT, alternative minimum taxable income, which is calculated by taking the taxpayer's regular taxable income and adding certain preference items. The taxpayer then determines its tax on regular taxable income and its tax on AMT and must report the higher of the two. One such preference item is depreciation; a taxpayer must use the alternative deprecation system in computing AMT, may expose a taxpayer to potential higher taxes. Thus, by deducting the rental payments made on leased assets rather than depreciating such assets, a taxpayer may reduce its overall income tax liability.

BARGAIN PURCHASE OPTION

A lease provision allowing the Lessee, at its option, to purchase the equipment for a price predetermined at lease inception that is substantially lower than the expected fair market value at the date the option can be exercised.

BROKER

A company or person who arranges for a fee transaction between Lessees and Lessors. A Broker has no ownership of the asset.

CAPITAL LEASE

A Capital Lease is beneficial if one plans to own the equipment at the end of a lease. The full purchase price plus interest charges are spread over the length of the lease. One will own the equipment at the end of the lease for a minimal amount, such as a fixed percentage of the original cost or $1.00. The equipment is depreciated as a capital asset while the present value of the firm lease payments appears as a liability on the balance sheet.

CERTIFICATE OF ACCEPTANCE (Delivery and Acceptance)

A document whereby the lessee acknowledges that the equipment to be leased has been delivered and is acceptable.

EQUITY INVESTOR

The owner of the asset.

FAIR MARKET VALUE

An option to purchase leased property at the end of the lease term at its then fair market value. The Lessor does not have the ability to retain title to the equipment if the Lessee chooses to exercise the purchase option.

FINANCE LEASE

Typically, a finance lease is a full-payout lease, in which Lessor will transfer ownership to Lessee at the end of the lease.

HELL-OR-HIGH WATER CLAUSE

Lessee unconditionally agrees to pay all payments when due.

LEASE

A contract in which one party conveys the use of an asset to another party for a specific period of time at a predetermined rate.

LEASE RATE FACTOR

A percentage rate whereby you can multiply any asset cost to calculate your periodic rental payment.

LESSEE

The user of the equipment being leased.

LESSOR

The party to a lease agreement who has legal or tax title to the equipment, grants the Lessee the right to use the equipment for the lease term, and is entitled to the rentals.

MASTER LEASE

A contract where the Lessee leases currently needed assets and is able to acquire other assets under the same basic terms and conditions without negotiating a new contract.

MODIFIED ACCELERATED COST RECOVERY SYSTEM (MACRS)

The Tax Reform Act of 1986 established the MACRS tax appreciation system prescribing depreciation methods for each MACRS class in lieu of statutory tables. Equipment is assigned among 3, 5, 7, 10, 15, or 20-year classes.

NONRECOURSE FINANCING

The lenders cannot look to the Lessor for repayment. The lender's only recourse is to the Lessee therefore, the Lessee's credit rating is of prime importance.

OPERATING LEASE

With an operating lease, the term is shorter than the expected useful life of the equipment. Rental payments do not cover the equipment cost for the Lessor during the initial lease term. This type of lease is popular for high-tech equipment because shorter-term leases help equipment users stay ahead of equipment obsolescence. The Lessor uses its equipment remarketing expertise to subsequently find other users for the returned equipment, something the typical equipment user does not have the time or ability to do. One should consult a tax advisor or accountant regarding the guidelines of an operating lease.

PRESENT VALUE

Current value of payments to be received in the future. The present value will vary with the interest rate used.

PURCHASE OPTION

A provision by which a lessee has the right to purchase the equipment at the end of the lease. The purchase option may be stated at a specified amount or at the fair market value.

RESIDUAL VALUE

The value of an asset at the conclusion of a lease.

SCHEDULE

A document that describes the equipment being leased, the lease term, commencement date, and rent.

TAX RIDER

A clause in which the lessee indemnifies the Lessor from loss of tax benefits.