Fair Market Value vs. $1 Buyout Lease

Equipment is essential to all businesses to operate. If you’re looking to boost operations and productivity, then leasing is the way to go. 

Equipment leases fall into two types: 

• $1 buyout leases  

• Fair market value (FMV) leases  

What’s the best option for your company? Here’s how to decide if leasing or buying is better for you. 

Fair Market Value lease 

A staple of car leases, an FMV lease (also known as an “operating lease”) is the most common type of lease in today’s market. Leasing is an affordable way to update and upgrade all kinds of business equipment. Almost every business needs equipment to operate. If you’re looking to boost operations and productivity, consider leasing new equipment versus purchasing costly equipment outright. Leasing is an affordable way to update and upgrade all kinds of business equipment that preserves cash for other needs. 

What to know about fair market value leases: 

• FMVs are among the most affordable leases 

• FMV leases are commonly used to secure information technology equipment, such as computers and tablets, servers, software, security systems, GPS and other technology-based equipment 

• FMV leases are often used by companies that do not want to retain the equipment at the end of the lease term  

• FMV leases help mitigate the cost of continuous upgrades and can circumvent the inefficiencies and maintenance issues often related to aging and outdated technology equipment 

• FMV lease terms generally range from 12 to 60 months 

• FMV leases offer fixed monthly payments 

Since the lessee does not own the equipment, it is not included in the company’s balance sheet, allowing the lessee to deduct the monthly lease payments as an operating expense. 

According to Priyanka Prakash, managing editor of FitSmallBusiness.com, “An FMV lease (called a ‘true lease’ by the IRS) doesn’t offer the benefits or responsibilities of ownership to the small business. You are not considered the owner of the equipment, and the equipment doesn’t show up as a business asset on your balance sheet. Because you’re not the owner, you can’t deduct the entire purchase price of the equipment on your federal tax return. You can only deduct the monthly lease payments as a business expense.” 

To qualify for an FMV lease, a good credit score is a must. 

$1 buyout lease 

Also known as a “capital lease,” a $1 buyout lease is like purchasing equipment with a loan. With this type of lease, there are higher monthly payments when compared to an FMV lease, but at the end of the lease term, the lessee purchases the equipment for $1. Because this type of lease is very similar to taking out a loan for equipment, it is often used when a business plans to keep the equipment for a long period of time, or when equipment obsolescence isn’t a concern. 

What to know about $1 buyout leases: 

• $1 buyout leases are used for equipment that retains its value over time, including construction equipment, automotive repair, material handling, tooling, cleaning equipment, and pressure washers 

• $1 buyout leases have a pre-set lease term with fixed monthly payments 

• Equipment ownership is often transferred to the lessee, so the equipment appears on the balance sheet as company assets  

• For tax purposes, there are advantages to leasing equipment with a $1 buyout lease in lieu of purchasing it. Prakash explains how this can be beneficial: “If you lease a $10,000 pizza oven on a $1 buyout basis, the oven will appear as an asset on your business’ balance sheet, and the lease will appear as a corresponding liability. For tax purposes, using Section 179, it is possible to deduct the entire $10,000 as a business expense in the first year of purchase” 

• At the end of the lease term, the lessee purchases the equipment for $1 

At Pathward, we realize businesses need viable, affordable options to make equipment acquisition possible. That’s why we offer both fair market value and $1 buyout leases and can help you determine the best equipment lease/finance solution for your business. Let us simplify the process for you! 

Ready to explore your leasing options? Contact Pathward Equipment Finance or call 888.999.8050.