Equipment leasing provides a framework for obtaining equipment with minimal initial investment. Under these arrangements, the vendor (or a third-party financier) will provide equipment in exchange for an income stream (i.e. lease payments) which may be fully tax deductible as an on-going business expense. The arrangement is very popular with state and federal government contractors, depending upon contract terms and business objectives. One cautionary note involves the final buy-out arrangement. Equipment leases, which allow buyers to purchase the equipment at the end of the lease term for less than fair market value, risk being construed as "financing arrangements." Incurring this risk could result in changing the tax character of the lease payments, as well as your right to retain the equipment at the end of any applicable government contract.
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