2027 CLFP Recertification

When financing equipment, most customers focus solely on the monthly payment and fail to recognize the type of contract they are signing. Confusion often arises when the contract happens to be a lease. Because the contract type drives ownership, end-of-term options, taxes, and insurance requirements, the distinction between various lease types matters more than most customers realize.

The leasing industry originally gained traction because businesses didn’t have the funds to buy equipment outright and leasing gave companies a way to use what they needed and to pay over time. Today, companies have more financing options, and many prefer owning equipment when the equipment has a longer useful life.

Not all leases work the same way, and the key difference usually comes down to the buyout.

For example, consider a common lease called a $1 buyout, often called a finance lease. The equipment is effectively paid off during the term of the lease, resulting in higher payments. The lessor typically holds the title during the term, which affects property tax and how the agreement is administered, and at the end of the term, the customer purchases the equipment for a nominal amount.

Another example is the Fair Market Value (“FMV”) lease, often called an operating lease. It’s built around equipment use, not ownership. The monthly payment will be lower because the equipment’s value is outstanding at the end of the lease. When the term is up, the customer can renew the lease, return the equipment, or purchase it at its fair market value.

This is why the contract type matters: A customer may think he or she is working toward ownership, only to discover the buyout is higher than expected or doesn’t exist at all. Others assume their payment covers everything and are surprised later by additional costs like property taxes or fees passed through under the agreement. Property tax responsibilities vary by structure and jurisdiction and are often billed separately or passed through to the customer, so it is important to confirm which party is responsible and how taxes will be invoiced.

Insurance is another area that can catch people off guard. With leases and rentals, the lessor owns the equipment, so they typically require the customer to hold both property and liability coverage. Property insurance protects the equipment itself, while liability insurance protects the lessor if they are pulled into a claim as the owner. From the customer’s perspective, this may seem excessive, especially for smaller items like laptops or phones.

There are also legal and accounting differences between products. Whether a lease is considered a “true lease” or a lease intended as security affects how it is treated from a legal and tax standpoint. On the accounting side, ASC 842 requires most leases to appear on the balance sheet, though finance and operating leases are still handled differently. Many rentals qualify as short-term arrangements and may be expensed, but accounting treatment ultimately depends on the specific terms of the contract.

At the end of the day, leases are an excellent way for a business to procure equipment. But different leases lead to different outcomes. Ownership, return obligations, taxes, insurance, and end-of-term options all depend on how the agreement is structured. The key is to make sure that structure is clearly understood upfront so there are no surprises later.