The Boca Leasing Center TRAC Lease

Boca Leasing Center Fleet Management Services is a leader in serving the equipment needs of the transportation industry. This experience has led us to develop innovative financing products to optimize your company's financial resources.

Competitive rates

Low initial advanced payments

Lease terms tailored to meet your business needs and tax position

Off-balance-sheet financing

Preservation of working capital lines

100% tax deductible lease payments

Ability to liquidate at any time after 12-month minimum lease term

What is a TRAC Lease?

Tax-oriented leases of qualified motor vehicles and trailers with Terminal Rental Adjustment Clauses are referred to as TRAC leases.

A TRAC lease must meet all of the requirements for a guideline lease, except for the TRAC provisions. A TRAC permits or requires an adjustment of rentals according to the amount realized by the lessor upon a sale of the leased vehicle.

For example, at the commencement of the lease term, the parties agree upon the TRAC amount. If at lease expiration the vehicle sells for more than the previously agreed upon TRAC amount, the lessee obtains a rebate from the lessor of rent paid equal to some or all of the excess sales proceeds (see Example A). However, if the vehicle sells for less than the previously agreed upon TRAC amount, the lessee must pay additional rent to the lessor equal to some or all of the deficiency (see Example B).

Example A:

Commercial Vehicle Sale Price:              $ 25,000

TRAC Amount (Estimated Book Value): $  5,000

End of Term Fair Market Selling Price:    $ 8,000

Lessee Rebate due from Lessor:            $ 3,000

Example B:

Commercial Vehicle Sale Price:              $ 25,000

TRAC Amount (Estimated Book Value):  $  5,000

End of Term Fair Market Selling Price:   $  3,000

Lessee Payment due to Lessor:              $ 2,000

TRAC provisions can benefit the lessee in two ways. First, they allow the lessee to share in the residual sales value of the vehicle. Second, because the lessee effectively guarantees the vehicle's residual value, the rentals to be paid during the lease term may be lower than otherwise available.

In connection with all TRAC leases, the tax laws require the lessee to sign a certification statement that it will use the vehicle at least 50% of the time in its trade or business. The certification also verifies that the lessee has been advised thev will not be treated as the owner of the vehicle for federal tax purposes.

Is a TRAC Lease a "True" or "Tax-Oriented" Lease?

Yes. A true or tax-oriented lease is a lease under which the lessor will be treated by the IRS as the owner of the leased property for federal tax purposes and permitted to take tax benefits (e.g., depreciation deductions on the leased property). All rentals paid by the lessee under a tax-oriented lease are deductible for federal tax purposes.

Doesn't a "True" or "Tax-Oriented" Lease Have to Include a Fair Market Value Option or 20% Residual at the End of the Term?

No. With Boca Leasing Center s TRAC Lease, there is no mandatory residual percentage. At the beginning of the lease, it must be assumed that the vehicle will have a value of 20% when the lease expires, abiding by the terms of Reg 75-21 for leveraged leases commonly called Fair Market Value or Closed End Leases (see "Guideline Lease Requirements" below). The TRAC Lease conforms to the terms of subsequent TRAC Lease Legislation (7701-h), which requires the terminal rental adjustment clause, which ultimately allows the lessee to guarantee a residual position, while observing all other terms of Reg 75-21. Therefore, the inclusion of a residual in the lease amortization that is greater to or less than the 20%, does not conflict with the legislation or guideline.

Guideline Lease Requirements

A guideline lease complies with all of the IRS requirements (or "guidelines") for a true lease; specifically those set forth in Rev. Proc. 75-21. In general, these guidelines include, but are not limited to:

1. The lease term including any extensions or renewals at a predetermined fixed rental must not exceed 80% of the estimated useful life of the vehicle at the commencement of the lease transaction. Thus, the vehicle must be projected to have an estimated remaining useful life equal to at least 20% of its original life at the end of the lease. These requirements limit the maximum term of the lease.

2. The vehicle's estimated residual value at the expiration of the lease term must be projected to equal at least 20% of its original value at lease commencement. This requirement also limits the maximum lease term.

3. Neither the lessee nor any related party may have a right to purchase the property from the lessor at a price less than its fair market value at the time of the purchase. Thus, the lessee may not be given any option to purchase the vehicle at a bargain purchase price. However, the lessee may be offered a fair market value purchase option.

4. Neither the lessee nor any related party may pay or guarantee payment of any part of the leased equipment or make any investment in the equipment. Thus, tax-oriented leasing is 100% financing.

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