Operating vs. Capital Leases

CSK Leasing offers a variety of lease products tailored to meet the needs of its clientele. Even with the wide variety of lease products available, leases can ordinarily be categorized for accounting purposes as either an operating lease or capital lease.

Operating Leases: These leases are kept off the lessee’s balance sheet and the entire lease payment is expensed for tax purposes. Operating leases are sometimes called “true leases” or “tax-oriented leases.” Under an operating lease, the lessor assumes the risks of ownership and takes any depreciation and/or available investment tax credits. Operating leases are often used for equipment vulnerable to technological obsolescence. In order to qualify as an operating lease, the lease structure must comply with the following accounting criteria of Statement No. 13 published by the Financial Accounting Standards Board (FASB):

• No automatic transfer of ownership to the lessee at the end of the term of the lease
• No bargain purchase option
• Lease term is less than 75% of useful life of equipment
• Present value of the lease payments is less than 90% of the equipment price

Capital Leases: If a lease meets the guidelines of FASB Statement No. 13, then it can be classified as an operating lease and kept off the balance sheet. If the lease does not comply with FASB Statement No. 13, then it will be identified as a capital lease (also known as a “conditional sale”). In this case, the equipment is capitalized on the balance sheet and the lessee is entitled to expense depreciation and interest for tax purposes. The lessee can also take any available investment tax credits.

CSK Leasing disclaims the accuracy of the information listed in this website as such information is based on generalized or hypothetical circumstances. The information in this website should not be applied to any specific situation nor considered financial, legal, accounting or tax advice. All users of this web site are strongly cautioned to consult their own financial, legal, accounting and tax professionals regarding the topics listed in this web site.