Solar Discovery

FAQs on Leasing

Q: What’s the difference between a loan and a lease?
A: Generally, the equipment being financed is the only collateral on a lease. That may notbe the case with a loan, where the lender, say the customer’s bank, may put a lien onsome or many of the borrower’s other assets. Sometimes a bank will even put a “blanket” lien on all the customer’s assets—cash, accounts receivable, inventory, other equipment, etc. Also, a lease will have fixed payments over a fixed term of so many months or years. A loan can be either fixed-term or could be “revolving” like a line of credit, and may have “floating” rates or adjustable payments.

Q: What’s the difference between a Non-Tax/Capital Lease and a Tax/True Lease? A: The difference lies in the ownership of the system, and the tax and accounting treatments that result.

In the Non-Tax/Capital Lease, the customer (lessee) owns the equipment and uses the tax credit, accelerated depreciation and write off of interest paid.

In the Tax/True Lease, the Lender (lessor) owns the equipment and receives the tax benefits. In this case, the customer will indirectly get those benefits through lease payments that are much lower than those in a loan or Non-Tax Lease.

Q: Which lease works best for most customers?
A: Overwhelming, the Tax/True Lease works best for most “for-profit” enterprises because many businesses, even though profitable, can’t make full use of the tax benefits! With the Tax/True Lease, they can still get the benefit—indirectly, through lower payments. Also, the Tax/True Lease can be used for those customers who can use the tax benefits, but may prefer the True Lease because it’s simpler to predict resulting cash flow and savings.

Even during these trying financial times, you can still go solar. And better yet, you can afford it. For both residential and commercial systems, leasing offers a great alternative to purchasing your solar electric system outright.

Why Leasing?
Commercial leasing is the smart way to acquire equipment and make your energy project a reality. For those new to leasing, the rule of thumb is: Buy what appreciates, lease what depreciates. Leasing provides the opportunity to not only go green, but do so in a way that is beneficial to your bottom line.

• Control Your Business
  With leasing, only the equipment is used as collateral. This allows your business to avoid liens on property and the financial restrictions that banks might require.


• Preserve Working Capital
  With conventional borrowing, more upfront money, plus a significant down payment may be required. This constrains your working capital and prevents the flexibility offered by leasing.
  
• Provides Fixed Payment
  With commercial leasing, you will know your payment over the lease term, allowing for more accurate forecasting and easier budgeting for monthly expenses.
  
• Hedge Against Inflation
  When you lease equipment, you pay for it as you use it. When you purchase with cash, you pay in current dollars for future use of the equipment


• Tax Advantages
  Leasing can lessen the burden that taxes have on your company’s wallet. Depending on how the lease is structured, you may be able to fully deduct lease payments as business expenses, as opposed to depreciating the value of the equipment as if it were an asset.

Sun Solar recommends you consult with your financial adviser to determine what the best arrangement is for your company’s unique financial position. If your interested in leasing your solar electric system, give us a call at 866-208-5041 or 847-810-0136.

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:

• 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)
  

The above example shows how taking advantage of Section 179 can significantly lower the true cost of equipment ownership from $125,000 to $84,890. For the specific impact to your company, please contact your tax advisor. Note: For complete details, or changes to the tax incentives, please visit www.irs.gov or contact the IRS helpline at: 800-829-4933


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
  

Reminder: To take advantage of the current year tax incentives, your business equipment must be put in use by year-end. Each company should contact their tax adviser to learn about the specific impact to your business.

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