The Anatomy of a TRAC Lease
A large section of the transportation industry, among others, is now taking advantage of a special type of capital equipment lease known as a TRAC lease. Also known as a Terminal Rent Adjustment Rider Leasing, it is an affordable way for a business whose primary interest is commercial vehicle leasing to finance ultimate ownership of those vehicles in a more convenient and affordable manner.
What is the purpose of said lease?
Instead of going through the hassle of obtaining financing for each truck, trailer, or trailer as needed, a business owner can negotiate a TRAC lease in order to lease the vehicle for a predetermined period of time and then purchase it at the final or terminal for agreed price. This allows them to pay monthly rental fees for the use of the vehicle and then pay a fixed price at the end for full ownership.
Negotiated payment amounts are more flexible than other leases, as they can be adjusted during the lease term. Seasonal commercial operators may pay for the vehicle lease with larger seasonal payments, for example, according to their cash flow options at the time. However, year-round operators can pay adjustable rental payments per month and even incremental payments to speed up the lease if they choose. All of this gives them the use of the vehicle, without having to make a large down payment or pay lots of financing fees, such as interest, over the life of the lease.
What happens when the lease ends?
When this lease is initiated, the fixed price per vehicle is negotiated and it is agreed to pay the leasing agent in full at the end of the lease. This price is usually a percentage of the vehicle’s fair market value at the beginning of the lease and will not change when the lease expires. Once paid, full ownership rights are transferred and the business owner can now claim full tax benefits on the purchase of the vehicle.
If the business owner chooses not to purchase the vehicle at the agreed price at the end of the lease, the leasing agent reserves the right to sell that vehicle directly to another party, if possible.
If the final sale price is less than the value agreed upon with the business owner, then the business owner must make up the difference to the leasing agent, as the leasing agent was legally required to accept that price from them at the end of lease. .
If the sale is made for more than the business owner’s negotiated price, then the business owner is owed a refund of the matching rental payments he or she had paid during the term of the lease.
Fiscal benefits
The IRS considers a TRAC lease to be a true tax-oriented lease. By being an owner, a business owner can claim the full depreciation of the vehicle, as well as any pre-ownership rental payments that would be allowed. Tax reform programs led to the creation of this type of lease so that commercial trucking companies could continue to keep newer and better trucks on the road and allow expenses to depreciate as if the truck were owned in the first place. This is yet another reason why this method is a much cheaper way to finance capital purchases in a tough economy.
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