Non-Tax Lease/Capital Lease
The most commonly used program in which the customer owns the system, uses the tax credit and accelerated depreciation; the term, or length, is usually 5 to 15 years, then customer buys system for a fixed predetermined amount, usually $1.00 to 20% of system cost.
Lease payments will be much higher than projected cost savings produced by the system, but solar incentives can be used by customer to make up the difference in overall cash flow. In this respect, and for tax and accounting purposes, the Non-Tax Lease is very similar to a bank loan.
Business owners who acquire equipment for their business: Photovoltaic Systems, HVAC, machinery and other tangible goods, usually prefer to deduct the cost in a single tax year, rather than a little at a time over a number of years. This deduction is known by its section in the tax code, a Section 179 deduction.
Benefits of a Non-Tax/Capital Lease
The benefit of a Non-Tax/Capital Lease is that it can take advantage of Section 179: Under Section 179, businesses that spend less than $450,000 a year on qualified equipment, can write off up to $112,000 in 2007 ($125,000 in 2008). The rules are designed for small companies, so the $112,000 deduction phases out when a business purchases more than $450,000 in one year. (Companies cannot write off more than their taxable income).
In addition, you may depreciate any excess on the depreciation schedule for that asset. Examples of Non-Tax/Capital Leases include a $1.00 Buyout Lease, an Equipment Finance Agreement (EFA), and a 10% Purchase Upon Termination (PUT) Lease. Example Calculation: Assume you finance $125,000 worth of business equipment, put it in use in 2007, and take advantage of Section 179. Your tax savings could be significant.
Example:
Tax Code Section 179 & Election to Expense Detail
The election, which is made on Form 4562, is for the tax year the property was placed in service or an amended return filed within the time prescribed by law. The total cost of property that may be expensed for any tax year cannot exceed the total amount of taxable income during the tax year. Section 179 property is property that you acquire by purchase for use in the active conduct of your business. To ensure property qualifies, reference Publication 946.
This expense deduction is provided for taxpayers (other than estates, trusts or certain non-corporate lessors) who elect to treat the cost of qualifying property as an expense rather than a capital expenditure. Under Section 179, equipment purchases, up to the amount approved for a given year, can be expensed (deducted from taxable income) if installed by December 31st. Non-Tax leases qualify for this deduction in their year of inception. Any excess above the expensed amount can be depreciated depending on the equipment type. Not all states follow federal law. Contact your tax adviser for further detail or visit http://www.irs.gov/for specific detail.
Tax Lease/True Lease
Tax/True Lease Lender owns the system and receives the tax benefits. The customer enjoys greatly reduced monthly payments as a result—often at or below the cost savings of the system, so customer has net savings with solar. Term is usually 5 to 15 years; customer buys system at end for the greater of:A) a stated percentage of original cost, usually 10% to 20%, orB) its then Fair Market Value (FMV), which we define as its value to another
For tax purposes, the customer can write off the lease payments and reduce taxes. Accounting-wise, the true lease may qualify as an “off-Balance Sheet” financing transaction.
Benefits of a Tax/True Lease
If a lease is a Tax Lease/True Lease, the lessor retains ownership and you, as the lessee, may be allowed to claim the entire amount of the monthly investment as a tax deduction. Many rental contracts qualify as a true lease including a 10% Option and a Fair Market Value Lease.
Example Calculation: Assume that you have a Tax/True Lease with a $1,000 monthly payment – check out the tax savings that may be available:
Which approach to use will depend on many factors, but the most important will be thecustomer’s ability to use the federal tax credit and the accelerated depreciation: few if any PV systems will make economic sense if these tax benefits are not used in the mostefficient manner. One of our goals is that everyone understands how the customer’sability - or inability - to use these benefits almost automatically makes the choice ofappropriate financing strategy.
Non-Profit Lease Programs (Non-Tax Lease)
The only choice for Non-Profit (501c) entities that desire to utilize leasing to obtain equipment. Most all equipment types are acceptable.
Municipal Lease (Tax Exempt Lease/Purchase)
Tax-Exempt Lease (aka “Muni” Lease) for government entities for terms of 10 to 25 years. Customer must be a tax-exempt government entity, or possibly a non-profit sponsored by one; customer owns the system, but cannot use the tax credit and accelerated depreciation because of tax exempt status.
This loss is mitigated by A) extremely low interest rates B) terms as long as 15, 20 or even 25 years, and C) higher rebates in California. Lower monthly payments result from a) and b), and net system price is reduced by c), all of which make the system more affordable.
With the increasing demand for services, public agencies have embraced tax-exempt leasing as an alternative means of acquiring needed equipment or upgrades.
Examples: State & Local Government Agencies, School Districts, Fire & Police Districts
The most commonly used program in which the customer owns the system, uses the tax credit and accelerated depreciation; the term, or length, is usually 5 to 15 years, then customer buys system for a fixed predetermined amount, usually $1.00 to 20% of system cost.
Lease payments will be much higher than projected cost savings produced by the system, but solar incentives can be used by customer to make up the difference in overall cash flow. In this respect, and for tax and accounting purposes, the Non-Tax Lease is very similar to a bank loan.
Business owners who acquire equipment for their business: Photovoltaic Systems, HVAC, machinery and other tangible goods, usually prefer to deduct the cost in a single tax year, rather than a little at a time over a number of years. This deduction is known by its section in the tax code, a Section 179 deduction.
Benefits of a Non-Tax/Capital Lease
The benefit of a Non-Tax/Capital Lease is that it can take advantage of Section 179: Under Section 179, businesses that spend less than $450,000 a year on qualified equipment, can write off up to $112,000 in 2007 ($125,000 in 2008). The rules are designed for small companies, so the $112,000 deduction phases out when a business purchases more than $450,000 in one year. (Companies cannot write off more than their taxable income).
In addition, you may depreciate any excess on the depreciation schedule for that asset. Examples of Non-Tax/Capital Leases include a $1.00 Buyout Lease, an Equipment Finance Agreement (EFA), and a 10% Purchase Upon Termination (PUT) Lease. Example Calculation: Assume you finance $125,000 worth of business equipment, put it in use in 2007, and take advantage of Section 179. Your tax savings could be significant.
Example:
- Equipment Cost - $125,000
- 1st Year Write Off: $112,000 ($112,000 is the maximum Section 179 write-off in 2007
- Normal 1st Year Depreciation: $2,600 ($125,000-$112,000 = $13,000 x 20% = $2,600
- **Depreciation calculated at 5 years = 20%
- Total 1st Year Deduction: $114,600 ($112,00+ $2,600 = $114,600)
- Tax Savings Assuming Rate of 35%: $40,110 ($114,600 x .35 = $40,110)
- 1st Year Savings / Lowered Equipment Cost: $84,890($125,000 - $40,110 = $84,890)
Tax Code Section 179 & Election to Expense Detail
The election, which is made on Form 4562, is for the tax year the property was placed in service or an amended return filed within the time prescribed by law. The total cost of property that may be expensed for any tax year cannot exceed the total amount of taxable income during the tax year. Section 179 property is property that you acquire by purchase for use in the active conduct of your business. To ensure property qualifies, reference Publication 946.
This expense deduction is provided for taxpayers (other than estates, trusts or certain non-corporate lessors) who elect to treat the cost of qualifying property as an expense rather than a capital expenditure. Under Section 179, equipment purchases, up to the amount approved for a given year, can be expensed (deducted from taxable income) if installed by December 31st. Non-Tax leases qualify for this deduction in their year of inception. Any excess above the expensed amount can be depreciated depending on the equipment type. Not all states follow federal law. Contact your tax adviser for further detail or visit http://www.irs.gov/for specific detail.
Tax Lease/True Lease
Tax/True Lease Lender owns the system and receives the tax benefits. The customer enjoys greatly reduced monthly payments as a result—often at or below the cost savings of the system, so customer has net savings with solar. Term is usually 5 to 15 years; customer buys system at end for the greater of:A) a stated percentage of original cost, usually 10% to 20%, orB) its then Fair Market Value (FMV), which we define as its value to another
For tax purposes, the customer can write off the lease payments and reduce taxes. Accounting-wise, the true lease may qualify as an “off-Balance Sheet” financing transaction.
Benefits of a Tax/True Lease
If a lease is a Tax Lease/True Lease, the lessor retains ownership and you, as the lessee, may be allowed to claim the entire amount of the monthly investment as a tax deduction. Many rental contracts qualify as a true lease including a 10% Option and a Fair Market Value Lease.
Example Calculation: Assume that you have a Tax/True Lease with a $1,000 monthly payment – check out the tax savings that may be available:
- Monthly investment = $ 1,000
- Finance Term = 36 months
- Tax bracket = 35%
- Monthly tax savings = $1,000 x .35 = $350.00
- Total tax savings over the term of the contract = $12,600.00
Which approach to use will depend on many factors, but the most important will be thecustomer’s ability to use the federal tax credit and the accelerated depreciation: few if any PV systems will make economic sense if these tax benefits are not used in the mostefficient manner. One of our goals is that everyone understands how the customer’sability - or inability - to use these benefits almost automatically makes the choice ofappropriate financing strategy.
Non-Profit Lease Programs (Non-Tax Lease)
The only choice for Non-Profit (501c) entities that desire to utilize leasing to obtain equipment. Most all equipment types are acceptable.
Municipal Lease (Tax Exempt Lease/Purchase)
Tax-Exempt Lease (aka “Muni” Lease) for government entities for terms of 10 to 25 years. Customer must be a tax-exempt government entity, or possibly a non-profit sponsored by one; customer owns the system, but cannot use the tax credit and accelerated depreciation because of tax exempt status.
This loss is mitigated by A) extremely low interest rates B) terms as long as 15, 20 or even 25 years, and C) higher rebates in California. Lower monthly payments result from a) and b), and net system price is reduced by c), all of which make the system more affordable.
With the increasing demand for services, public agencies have embraced tax-exempt leasing as an alternative means of acquiring needed equipment or upgrades.
Examples: State & Local Government Agencies, School Districts, Fire & Police Districts
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