FMV Lease (Operating Lease)

A Fair Market Value (FMV) Lease provides the Lessee the right, but not the obligation, to purchase a leased asset at the end of the lease term for a price that represents the item’s then‐current worth. The FMV Lease end of term purchase option price is not determined in advance.

A fair market value lease (FMV) may not qualify as an Operating Lease for tax accounting purposes. An Operating Lease may also referred to as a “True Lease” or “Tax Lease”.

The most notable feature of this type of lease is that its structure does not contemplate a full payout of the cost of the equipment as is the case in a “Capital” or “Finance” type lease. Two of the common tests are:

  • The term of the lease is generally not greater than 75% of the equipment’s anticipated useful life.
  • The present value of the lease payments should not exceed 90% of the fair market value of the equipment using the Lessee’s incremental cost of borrowing.

A significant benefit is that the monthly payments are also less than on a finance type lease. Typically, the Lessee either returns the equipment at the conclusion of the lease or may be granted the opportunity to purchase the equipment from the Lessor for “the then fair market value.” Payments under this kind of lease structure are treated (by the I.R.S.) as rental payments and therefore are 100% tax deductible operating expenses. Also, as rental payments, neither the asset nor its corresponding
liability needs to appear on the company’s balance sheet. The Lessor retains the right to depreciate the equipment.

At the end of the lease‐base term the FMV Lease may offer the following options assuming there is no event of default:

  • The Lessee may have the option to continue renting the equipment on a monthly basis.
  • The Lessee may have the option to “re‐lease” the equipment for a defined term.
  • The Lessee may have the option to purchase the equipment at the then fair market value.
  • Or, the Lessee may return the equipment with no further rental obligation.
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