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CLFP EXAM (Daniel's Exam) with Questions & Answers Graded
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CLFP EXAM (Daniel's Exam) withQuestions & Answers Graded A
Trac Lease - ✔✔A lease on automobiles, trucks or trailers which may be a true lease for IRS, despite,
that it contains a Terminal Rental Adjustment Clause (TRAC) which guarantees the lessor the residual
value. The lessor must: (a) maintain a minimum at-risk position equal to the borrowings used to fund the
vehicle (b) Obtain a lessee certification that the lessee will use the vehicle more than 50% for business.
True Lease (Tax Lease) - ✔✔A lease, which for tax purposes, fails to meet all of the tests for a
conditional sale contract under IRS ruling 55-540, therefore, the lessor qualifies for the tax benefits of
ownership and lessee to claim the entire amount of the lease payment as a tax deduction.
Wet Lease - ✔✔A GROSS LEASE, traditionally for aircraft or marine vessels in which the lessor
provides bundled services such as the payment of property taxes, insurance, maintenance costs, all
personnel, fuel, and provisions to operate the craft.
Ruling 55-540 (1955) - ✔✔Tax ruling that classified a conditional sale contract as a transaction
having all of the following conditions (IF PETS) [Its a true lease if it failed these]: 1. Interest - some
portion of the payment is characterized as interest. 2. Fair Market - payments were substantially higher
than fair market. 3. Purchase - nominal purchase option at lease end. 4. Equity - a portion of the
payment could be applied to an equity position in the asset. 5. Title - ownership automatically transfers
at lease end. 6. Sum - sum of payments was a significant portion of the purchase price.
Investment Tax Credit (ITC) - ✔✔Provided purchasers of equipment with a tax credit they could
use to offset their total tax liability. Initially it was 7% of the OEC. When the feds needed more tax
money they took this away. This was eliminated with the Tax Reform Act (TRA '86).
Tax Reform Act (TRA '86) - ✔✔The 2 major impacts of this act were the elimination of ITC and
that businesses began keeping 2 sets of books, 1 for accounting and 1 for tax purposes.
,Alternative Minimum Tax (AMT) - ✔✔A tax calculation where the company has to pay the greater of
the regular tax calculation or the this tax. Triggered by an event like accelerated depreciation, prevents
a taxpayer from excessively reducing it tax liability.
Asset Depreciation Ranges (ADR '72) - ✔✔Provided the lessor with a method for selecting a useful
life that could not be challenged by the IRS.
What did the adoption of FASB 13 Accomplish? - ✔✔It set forth 4 criteria that distinguishes a
capital lease from an operating lease for book accounting on lessee and lessor financial statements.
How is a true lease treated for tax purposes from the lessor's perspective? - ✔✔Lessor
deducts depreciation expense for the asset and benefits from any tax credits.
When deciding lease vs. buy, what factors should be considered? - ✔✔A. Tax implications -
state/local/federal, B. Internal Rate of Return (IRR) - lessee's after-tax return on equity, C. Sales Tax -
usually upfront on CSC on stream for rental products, D. All cash flows, E. Tax depreciation
methodology (MACRS). Note: A higher ROE will favor leasing from a Lessee's perspective.
What are the most common lease-end options? - ✔✔Renew, purchase, or return.
What is the difference between an operating lease and a true lease? - ✔✔An operating lease is
defined by FASB-13, it's not on lessee's balance sheet, and has a significant residual. A true lease is
defined by failing the IRS Rule 55-540, lessor depreciates the asset, and lessee expenses the full rental
payment.
Why is leasing a popular method of financing? - ✔✔1. Lessee benefits from the USE of the
equipment, not ownership, 2. Lessee can manage obsolescence, 3. Fixed rate, 4. Off-balance sheet
treatment, 5. Expense rental payments.
What are the CLFP standards of professional conduct? - ✔✔1. Honest, ethical and
professional business dealings, 2. Respect advanced fees or security deposits, 3. Gain education,
improve competency, and promote education, 4. Never make false/misleading statements, 5. No
fraud, 6. Leadership - held to the highest standards.
, What is depreciation? - ✔✔When a company recovers the cost of a purchased asset over time
through periodic deductions to income. (a) financial reporting - depreciate asset according to company's
policy (b) Tax - depreciation reduces taxable income and liability (accelerated depreciation, like MACRS,
provides larger deduction earlier in assets life).
What is tax law? - ✔✔Determines eligibility for tax benefits: depreciation, investment tax credit,
and lessee expense payments
What is the history and impact of Tax Credits on the leasing industry? - ✔✔1962 - congress
introduced the Investment Tax Credit (ITC): (a) initially a 7% of OEC credit (b) offset to tax liability
(tax deduction) (c) government used ITC to stimulate economy (ITC on) or raise tax revenue (ITC off)
1986 - ITC eliminated by Tax Reform Act(TRA '86): tax credits allowed lessors to benefit from credits and
pass on lower payments to lessees. Also resulted in organizations keeping 2 sets of books (accounting +
tax).
What is the distinction between leasing and financing? - ✔✔Leasing: an agreement that transfers
possession & use of property for a consideration, rental agreement with right to use, lessor maintains
title. Defined as a tax lease by failing IRS 55-540, operating lease by FASB 13, a true lease under UCC
Article 2A.
Financing: an agreement for the purchase of an asset. Defined as a secured transaction by UCC Article 9,
capital lease by FASB 13, conditional sales contract by IRS 55-540 (also non-tax lease, money over
money, lease intended as security).
What are the FASB 13 requirements for a capital lease? - ✔✔(a) automatic transfer of title at lease
end (b) lease contains a bargain purchase option (c) lease term is = or > 75% of the estimated economic
useful life of the leased property (d) PV of minimum lease payments at commencement is = or > 90% of
the FMV of the property, reduced by any ITC.
What is Revenue Procedure #75-21? - ✔✔An IRS ruling to clarify 55-540 for ADVANCE RULING only,
LESSOR is OWNER of the leased property IF: (a) maintains at least 20% AT-RISK EQUITY position (b)
LESSEE CAN'T INVEST in PROPERTY (c) LESSEE may ONLY have FMV right to BUY d) LESSEE many Not
lend money to lessor to buy the property (e) LESSOR must show PROFIT in deal beyond tax benefits.
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