The type of aircraft lease you select depends on the needs and capabilities of your company.
- Considerations include the company’s cash flow, working capital, balance sheet, accounting, and tax needs.
- Operating leases and capital finance leases are two options with different features and benefits.
- An off-balance sheet loan is structured to capture some of the benefits of both the operating lease and the capital lease.
There are many ways to lease aircraft. The type of lease you need depends upon the needs and capabilities of your company. Here are a few examples along with some of the advantages and disadvantages of each.
Under a standard operating lease, the lessor will be owner of the airplane. However, the rent payments likely will be reduced to offset the tax advantages retained by the lessor. The longer the lease commitment, the more likely that payments will be low because the lessor bears less risk regarding the residual value of the asset. With an operating lease:
- You can deduct the full rental payment as an expense because it is a true lease, unlike what you could do with a straight purchase or capital finance lease.
- You likely will have lower monthly or periodic payments than with a purchase.
- The transaction does not show up as a debt on the balance sheet, though lease obligations may have to be reflected in footnotes.
- You have the flexibility to minimize your obligations as compared with a purchase or capital lease.
- You cannot deduct depreciation or build equity in the asset because you do not own the aircraft.
Capital finance lease
A finance lease gives you some of the benefits of ownership while at the same time providing a way to finance all of the costs of acquiring the asset. Under a capital finance lease:
- You can claim the depreciation, unlike under an operating lease. Ownership of the asset may pass to you at the end of the lease term or be subject to a purchase option, providing the benefits of equity buildup.
- You cannot fully expense the payments, as would be permitted under an operating lease, but you can deduct the interest.
- The transaction likely will be treated as a loan for bookkeeping purposes, reflected as both an asset and liability.
- The monthly or periodic payments likely will be the lowest with this form of lease.
The off-balance sheet loan
Another alternative growing in popularity is the “off-balance sheet loan.” The transaction is structured to capture some of the benefits of both the operating lease and the capital lease. The loan is structured as a lease and the lender is designated as the lessor, but the lessee is treated as the owner for some purposes. The lease usually has a fixed buyout at the end of the lease, usually at a value that is less than the true residual value of the aircraft. The buyout is optional for the lessee. Under an off-balance sheet loan:
- The lessee can deduct depreciation as if it were the owner of the aircraft.
- The transaction can be treated as a lease instead of a debt for accounting purposes.
- The lease can finance 100% of the acquisition cost.
- The lessee can choose to acquire ownership of the aircraft or not to do so pursuant to the fixed buyout.
There are specific features that the transaction must have in order to have the advantages described above. The transaction must be carefully structured. However, even with careful structuring, some accountants may be uncomfortable with use of this structure as a way of keeping debt off the balance sheet.
Choosing the best lease
Selecting the best type of aircraft lease for your company requires consideration of the company’s cash flow, working capital, balance sheet, accounting, and tax needs. Experienced professionals can help you weigh the relative advantages and disadvantages of the different types of aircraft leases and can structure the transaction to satisfy relevant tax and accounting rules.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, while this presentation is not intended to provide tax advice, in the event that any information contained in this presentation is construed to be tax advice, the information was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any matters addressed herein.Contact an Expert