1. BASICS OF TAX AND ACCOUNTING

2. There are two basic types of leases:
TAX
There are two basic types of leases:
Tax Oriented Lease – The provider of the lease financing (the Lessor) purchases the equipment and is the owner of the equipment for tax purposes. The Lessor is entitled to the tax benefits of ownership (depreciation) and as a result can offer a lower rate to the company (Lessee).
Non-Tax Oriented (Capital) Lease – The Lessor provides 100% financing but the tax ownership remains with the Lessee.

3. Tax Cuts and Jobs Act of 2017 (“Trump Tax Cuts”)
100% Bonus Depreciation – through 2022
New and Used Equipment
Lower Corporate Tax Rates
21% Top C Corp rate
20% Deduction of QBI for pass-through entities
Interest Expense Limitation
Limited to 30% of taxpayer EBITDA
More Lease Opportunities

4. ACCOUNTING
Recent Changes to GAAP Accounting Standards Codification (ASC) Section 842 Changes the requirement for capitalizing leases on lessee’s financial statements.
Finance Lease – In a finance lease, the asset is called “finance lease right of use assets” and the liability, or capitalized rent payments, is called “finance lease liability” (classified as debt). The lease costs are front ended comprised of imputed interest expense and asset amortization.
Operating Lease – In an operating lease (a lease that fails to meet the ASC 842 criteria to be a finance lease) the capitalized value (PV of the payments) is presented as “operating lease right of use assets” and “operating lease liability”. The lease cost is straight line average rent expense.
*Accounting Standards Codification (ASC) Section 842 – Under The new FASB codification, ASC 842 is the section that covers lease accounting rules (replacing FAS 13).

5. ASC 842: Finance vs. Operating Leases
ACCOUNTING
ASC 842: Finance vs. Operating Leases
Finance Lease (At least one of the 5 criteria must be met.)
Operating Lease (All criteria must be met.)
Automatic transfer of ownership at end of term
Yes No
Bargain purchase option
Term
Major part (≥ 75% ) of useful life
Less than 75% of useful life
Present value of rentals using the Incremental Borrowing Rate or the Implicit Lease Rate
Substantially all (≥ 90%) of equipment cost/fair value
Less than 90% of PV of equipment cost/fair value
Asset is specialized with no alternative use to the lessor

6. LEASE VS. LOAN ANALYSIS ASSUMPTIONS
Loan Terms
$1,000,000 equipment cost
7 years; monthly payments in arrears
84 $14,422
Implicit rate = 5.609%
Funding Date
Assumed August 1, 2018
Tax Depreciation
Borrower - MACRS Depreciation (Assumption is Borrower cannot use 100% Bonus)

7. LEASE VS. LOAN ANALYSIS ASSUMPTIONS
Lease Terms
$1,000,000 equipment cost
7 years; monthly payments in advance
84 $12,207
Implicit rate = 0.728%
Funding Date
Assumed August 1, 2018
Tax Depreciation
Lessor % bonus depreciation
Lessor Residual Assumption = 20%
Lessee End of Lease Options
Purchase for Fair Market Value
Renew lease at Fair Rental Value
Return equipment to the Lessor

8. 7-YEAR TERM ACCOUNTING ANALYSIS
Loan Expense
Year
Interest
Depreciation
Total Loan Expense
Lease Expense *
2018
$18,423.57
$59,523.81
$77,947.38
$61,035.00
2019
$50,778.83
$142,857.14
$193,635.97
$146,484.00
2020
$43,740.34
$186,597.48
2021
$36,296.68
$179,153.82
2022
$28,424.59
$171,281.73
2023
$20,099.40
$162,956.54
2024
$11,295.00
$154,152.14
2025
$2,389.59
$83,333.33
$85,722.92
$85,449.00
* Straight Line Lease Expense is allowed for operating leasing under current and proposed ASC 842 lease accounting.

9. OTHER CONSIDERATIONS Current and Future Tax Positions
Anticipated Equipment acquisitions
Loss Carry Forwards
Financing Caps under Credit Facilities
Transfer ownership to Lessor
Operational flexibility/return options under lease financing
ASC 842 will be effective:
As of December 15, 2018 for public entities
As of December 15, 2019 for private entities