Synthetic Lease

Considered to be the best of both worlds, a synthetic lease is a transaction that qualifies as a lease from an accounting standpoint, but as a loan from a tax standpoint.

Benefits of a Synthetic Lease

This allows the lessee to not account for the asset as a liability on their balance sheet (off-balance sheet financing) and take advantage of the tax benefits (through depreciation) of owning an asset such as a piece of equipment.  The end result can save your business money by paying less in taxes. Also, your leverage ratios, such as debt-to-equity, turn out to be better for not having the asset on your balance sheet . Subsequently, banks and other lenders will look upon your businesses financial statements more favorably.

How Do I Structure A Synthetic Lease?

Generally a synthetic lease is structured through a non-operating entity (asset-holding company) that will purchase and hold the equipment (asset) on it’s books. That asset- holding company (lessor) will then lease the equipment to the operating company (lessee) as an operating lease following the rules of FASB 13.  It is crucial that all 4 rules of FASB 13 are met in order for the lease to not be considered a capital lease. If the lease is considered a capital lease, then the equipment will show up as a liability on the operating entities balance sheet.

Beware

A synthetic lease is a complex lease structure and just like any other major financial decision, you should seek the advice of a CPA and Attorney before making your final decision.