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Municipal Lease:
INTRODUCTION
ELIGIBLE
AGENCIES
FAQ
LEASE
vs BOND
WHAT IS TAX EXEMPT?
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Tax Exempt
Municipal Lease for Equipment or Vehicles
A tax-exempt municipal lease, also known as a lease-purchase agreement, is a
contract that enables
government entities
to acquire essential-use assets, including fire and
public safety equipment, modular buildings, vehicles, computer hardware and
software, real property and much more.
In a tax-exempt municipal lease, the government entity has a ”non-appropriation
of funds” clause in the agreement. This allows the lessee to terminate the lease
at the end of its fiscal year if funds have not been appropriated for the coming
year’s payment without the lessee being in default under the lease terms and
conditions. This clause serves as the basis for a municipal lease not violating
the public debt limitations that typically require voter approval for a
municipality to enter into a long-term debt obligation.
Equipment leasing is a lower cost alternative to traditional bond
financing. In addition the tax-exempt municipal lease offers
government entities a wide range of benefits in procuring essential assets:
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Low, tax-exempt interest rates that are fixed for the term of
the lease
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Increasing equity with every payment, resulting in complete
ownership and clear title to the equipment at the end of the term
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Lease payments that are considered an operating expense, not
long-term debt, thereby providing an avenue to ownership that does not create
a debt obligation
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An alternative to the high issuance cost bond market and the
time and complexity of obtaining voter approval for a bond issue
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An option to prepay the contract throughout the term for a
predetermined purchase price
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Payments structured to meet the lessee’s cash flow and
budgetary requirements on a monthly, quarterly, semiannual or annual basis
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A master lease program that allows for simple add-on
schedules
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Desirability of matching costs and benefits over time
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Prevention of technological obsolescence
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Fixed monthly payments
Who qualifies for tax-exempt municipal leasing?
In order for a lease to be tax-exempt for federal (and possibly state) income
taxes, the following are required:
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The lessee must be viewed as a
“municipality” and have one of the following powers:
1) taxation
2) eminent domain
3) police
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The interest rate or component must
be itemized in some form (most funding sources prefer an amortization schedule
breaking out the actual dollars of interest in each payment, as opposed to
simply providing the interest percentage rate.
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The lessee must obtain an equity
interest in the property being financed during the lease term. This is usually
shown by a nominal purchase option of $1.00 or a small amount in relation to
the actual value at the end of the lease.
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The useful life of the equipment
must be equal to or longer than the lease term
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The lessee must file an IRS 8038-G
or 8038-GC form within a set time frame after the lease commences, as opposed
to the usual process in which the lessor files these forms.
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The property must meet the
private-public use rules, in which no more than 5% (but in some cases, up to
10%) can be used for private purposes.
If any one of the above
requirements is not met, the lease cannot be completed on a tax-exempt basis. If
the lessee does not want “ownership” of the property, a conventional taxable lease is more appropriate.
Thank you |
