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The Anatomy of a TRAC Lease

A large sector 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 Leasing with a Terminal Rent Adjustment Clause, it is an affordable way for a company whose main interest is the leasing of vehicles for commercial purposes to finance the final ownership of those vehicles in a more convenient and affordable way.

What is the purpose of said lease?

Instead of going through the hassle of obtaining financing for each truck, because or trailer as needed, a business owner can negotiate a TRAC lease to lease the vehicle for a predetermined period of time and then purchase it from the dealer. end or terminal for agreed price. This allows them to pay rental fees per month 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 business operators can pay for the vehicle rental 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 a lot of financing fees, such as interest, over the life of the lease.

What happens when the lease ends?

When this lease is started, the fixed price per vehicle is negotiated and it is agreed to pay the leasing agent in full when the lease ends. This price is usually a percentage of the fair market value of the vehicle at the beginning of the lease and will not change when the lease expires. Once paid, the full ownership rights are transferred and the business owner can now claim all the tax benefits for the purchase of the vehicle.

If the business owner decides not to purchase the vehicle at the price agreed upon 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 agreed value with the business owner, then the business owner must make up the difference with the leasing agent, since the leasing agent was legally required to accept that price from them when end of lease. .

If the sale is made for more than the negotiated price to the business owner, then the business owner is owed a refund of the equivalent rental payments they had paid during the term of the lease.

Fiscal benefits

The IRS considers a TRAC lease to be a true tax-oriented lease. By owning, a business owner can claim full depreciation on 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 roads and allow expenses to be depreciated as if the truck was owned from the beginning. 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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