Leasing: Open-End or Closed-End?
Large Commercial Fleets, Small Commercial Fleets, Open-End Leasing, Closed-End Leasing, Operating Lease, Open-Ended TRAC Lease, Terminal Rental Adjustment Clause, Tax Codes
Leasing seems to be the wiser choice, when it comes to acquiring large commercial fleets. But even small commercial fleets are beginning to see the advantages of leasing over buying.
According to BusinessFleet.com, leasing fleet vehicles “reduces the amount of capital tied up in non-core assets, as well as reduce sales tax by paying tax on the lease payments instead of paying tax on the vehicle purchase amount.”
There are two types of lease: open-end and closed-end.
In an open-end lease or open-ended Terminal Rental Adjustment Clause (TRAC) lease (also known as operating lease), “the lessee agrees to a minimum term that’s usually at least 12 months and can terminate the agreement at any point after the end of the term. The lessor then sells the vehicle,” explains BusinessFleet.com
“Terminal Rental Adjustment Clause is a certification that tells the Internal Revenue Service that the lease conforms to its tax codes and is a true lease,” BusinessFleet.com further adds.
Lessee will receive a reimbursement, in the event that proceeds of the sale are more than what was calculated in the agreement. However, if the vehicle sells for less than what was agreed upon, “lessee must reimburse the lessor for the difference.”
Open-ended leases do not have mileage restrictions and are therefore more practical for companies who have unpredictable mileage.
A caveat though: high-mileage vehicles depreciate faster, thus an open-end lease will carry the brunt in the used-vehicle market. Lessee will assume responsibility when it comes to re-marketing decisions, “including the risk or reward involving resale value,” says BusinessFleet.com.
There are different kinds of open-end leases being offered by fleet management companies. The open-end lease will depend on accounting guidance from the company’s finance department.
Whether it will be determined as a capital lease rather than an operating lease will be dependent on the accounting guidance that governs the leases, says ARI Controller Bryan Wilson.
“A lease would be considered a capital lease if the ownership of the asset is shifted to the lessee, the lessee purchases the asset at below market price by exercising ‘a bargain price option,’ the lease term encompasses at least 75 percent of the useful life of the asset, or the present value of the minimum lease payments — plus any lessee guarantee — is at least 90 percent of the fair value of the asset at least inception,” states BusinessFleet.com.
“If at least one of the four criteria is true, then the lease would be classified as a capital lease on the lessee’s account books,” Wilson advises.
The benefits of an open-end lease
Open-end leasing “typically offer a fleet manager more flexibility in dealing with variable mileage and greater input into re-marketing decisions,” says BusinessFleet.com.
Strategic Consulting Manager for Element Fleet Management Bruce Wright adds: “We have found that the TRAC lease meets the objectives of the widest audience. The TRAC lease traditionally offers the lowest total cost of ownership over the long run of the portfolio, due to the customer experiencing the actual depreciation based on their asset utilization patterns.”
We have a huge selection of RAM vehicles to lease here at Mcpeeks Dodge of Anaheim. Come visit us at 1221 S. Auto Center Dr. Anaheim, CA 92806 and take a test drive today or check out our online inventory here. if you have any questions feel free to give us a call at (877) 389-8538