Purchase vs. Leasing
To understand the purchase verses leasing option and compare and contrast the
choices, we must first understand that there are two types of leases that copier
dealers sale. While the lease agreements first appear to be quite similar, they
are in fact very different. The two types are are Fair Market Value, (FMV,)
lease and a Purchase Lease, or "dollar out" lease. In the past the
"dollar out" was the most popular and almost all copier leases were of this
type. Today, for reasons we will discuss later, the dollar is not so common and
most copier leases are of the FMV type. We will look at both type of leases.
Fair Market Value (FMV)
The FMV is a true lease according to the IRS. The Internal Revenue Service
ruled some years ago that any least with a right to purchase by the lessee at a
set price, any set price, is in actually a purchase agreement not a lease. The
Fair Market Value lease was the copier leasing companies' answer to this ruling.
In a FMV lease the lessee can buy the equipment at the end of the lease for
the "fair market value" of the equipment. The lessee can actually buyout the
lease at anytime but leases are structured in such a way as to discourage lessee
form ending the lease before its term runs by making the buyout prohibitively
high in the beginning of the lease. Why would anyone want a lease the requires
them to pay fair market value when they can have a lease with only a one dollar
buyout? Well for one reason the FMV lease payments are normally lower but this
is not the true reason. The attraction to the lessee of a FMV lease is that it
is a true lease according to the IRS and the lessee can have all the advantages
of a true lease. The most important of these advantages is that the lessee can
deduct all of the lease payments from their income when the payments are made.
If they purchase the equipment, (in a cash sale or purchase lease,) the only
deduction is the deprecation of the equipment.
Lessee FMV Advantages
The ability to immediately expense out the lease payments is the chief reason
a company goes with a FMV lease. Of course this is only an advantage if the
company is profitable. What it the company is not profitable and there is
no need or advantage to expensing out the payments; are there still reason to
chouse a FMV lease? Yes, the most obvious is that the lease payments on a FMV
lease will be lower than a purchase lease and if the company is not profitable
right now making the large outlay of a cash sale is probably not in the
company's best interest.
Dealer FMV Advantages
For you to make a fully informed decision about a FMV lease you must also
know, and take into consideration that the dealer has some strong incentives to
putting you into a FMV lease. Equipment leasing companies give a decide
advantage to the dealer who wrote you the lease. The most important of these is
the buyout. Suppose you have six months left on you FMV lease and you need to
upgrade you copier. You shop around with several dealers and find a copier and a
dealer you want. This is a different dealer than the one that leased you you
current copier. When the new dealer gives you the buyout cost for you current
copier it is three or four times higher than the cost the old dealer told you.
This is because there are two buyout cost. One is for the dealer who sold you
the lease the other is a competitive buyout. The buyout cost will always be much
higher if you go with another dealer.
As you can see, a dealer will always want to put you in a FMV lease because
it is then much easier for them to keep you as a customer. Does that mean
that FMV leases are bad for the customer? No, not at all. In many cases a FMV
lease is just what a company needs to get a new copier. Just know that the
dealer almost certainly wants you in a FMV lease for the dealer's advantage not
Purchase Lease (Dollar Out Lease)
As you no doubt know by now, a purchase lease is really just a purchase money
financing option. It has none of the tax advantages of a FMV lease and should be
compared to other financing sources. Can you get a better rate at the bank?
Actually see what the payments will be and what your total cash outlay will be
to compare the options.
As in a FMV lease your dealer has some advantages in a purchase lease. After
the lease term runs and you purchase the copier the dealer has no carrot to hang
in front of you, but what if you need to buyout the lease early? Here again
there is two different buyouts. The one your currently dealer and get you and
the much more costly competitive buyout.