Presented by Sofema Aviation Services www.sassofia.com
Introduction
Difference Between Ownership, Operating and Financial Lease
Operating leases and capital finance leases are two options with different features and benefits.
Essentially the differences between the two basic forms of lease (operating lease and finance (capital) lease, are mainly related to who owns the leased asset, what accounting and tax treatment is given, who bears the expenses and running costs, whether a purchase option is present, and the length of the lease term.
Selecting the best type of aircraft lease for your company requires consideration of the company’s cash flow, working capital, balance sheet, accounting, and tax needs. The challenge is to weigh advantages and disadvantages and to structure the transaction to satisfy relevant tax and accounting rules.
Which is best Aircraft Ownership Option – Ownership, finance lease or operating lease?
There are many ways to lease aircraft. The type of lease you need depends upon the needs and capabilities of your company. Here are a few examples along with some of the advantages and disadvantages of each.
Ownership – Outright ownership provides the freedom of both operation & modification, the ability to define the customisable options, Maintenance planning is fully operator defined and depreciation and interest tax benefit is available.
Ownership incurs high initial costs and can create a technology trap as the tendency is to keep the asset for a long time. There is also potential exposure to residual valuation risks.
Operating lease – Under a standard operating lease, the lessor will be the owner of the aeroplane. However, the rent payments may reflect the tax advantages retained by the lessor.
longer leases typically mean that payments will be lower because the lessor bears less risk regarding the residual value of the asset.
With an Operating Lease – You can deduct the full rental payment as an expense because it is a true lease, unlike what you could do with a straight purchase or capital finance lease.
You likely will have lower monthly or periodic payments than with a purchase.
Flexibility to minimize obligations as compared with a purchase or capital lease.
With an Operating lease, you cannot benefit from depreciation or build equity in the asset.
Capital Finance Lease – A Capital Finance lease provides certain benefits of ownership and provides a way to finance many of the costs of acquiring the asset.
Under a capital finance lease depreciation can be claimed.
Ownership of the asset can pass to you at the end of the lease term rolled over into another lease or be subject to a purchase option which provides benefits of the accumulation of equity.
Interest may be deducted, the Lease will contain a loan element reflected as both an asset and a liability.
Note – Capital Finance Leases typically have the lowest monthly payments.
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