| What is a lease? |
Here’s a friendly and simple introduction… to what a lease is and what are the basic types of leases on the market.
What is a Lease?
A lease is a contractual document in which one party (The Lessor) conveys the use of an asset to another party (The Lessee) for a specific length of time (lease term) at a predetermined schedule of payments (usually monthly).
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2 Major Types of Leases |
Operating Lease
Any lease that is not a Capital Lease. Generally used with equipment that rapidly depreciates or becomes obsolete in a short period of time. The Lessor books and depreciates the equipment as an asset, and the Lessee expenses the lease payments (usually classify these payments as an operating expense).
An operating lease is considered an off-balance sheet liability and contains a provision to purchase the equipment at the end of the lease for the Fair Market Value. This is typically considered the most tax friendly form of leasing. *Please contact your accountant for a full explanation of operating leases and how they can benefit your business.
Capital Lease
A type of lease which is treated as a purchase by the Lessee and by the Lessor as a sale or financing. Generally Capital Leases can be identified if it meets the following criteria:
- The lessor transfers ownership or title to the lessee at the expiration of the lease term.
- The lease term is equal to 75% or more of the estimated economic life of property (there are exceptions for used property leased toward the end of its economic life).
- The lease contains an option to purchase the asset at a bargain price.
- The present value of the required lease rental payments are equal to 90% or more of the estimated Fair Market Value of the leased asset at lease inception. If you plan on owning the equipment at the end of lease term or your long term goal is to own the equipment this might be a good lease for you. *Please contact your accountant for more information.
Curious about what benefits leasing provides? Take a look at the Benefits of Leasing so you can address the advantages that can help your company grow...