Today, the TRAC lease is the most popular
method of financing heavy, medium and light
duty trucks and trailers for commercial use.
This method of financing came out of the
1981 Economic Recovery Tax Act and was
later modified by the 1986 Tax Reform Act. A
special provision in IRS Code allows a TRAC
lease to be treated as a true lease for
Federal Income Tax purposes.
TRAC stands for “Terminal Rental Adjustment
Clause” which requires a rent adjustment at
the end of the lease term, depending on the
actual value of the vehicle compared to the
stated residual. If the vehicle is sold for more
than the stated residual, the lessee obtains a
rebate of rent paid equal to some or all of the
excess sale proceeds. However, if the
vehicle sells for less than the stated residual,
the lessee must pay additional rent equal to
some or all of the deficiency.
The lessee must certify, in writing, that more
than 50% of the use of the equipment will be
used for business purposes and that the
lessee has been advised they will not be
treated as the owner for federal tax
purposes.
