Operating Lease Versus Capital Lease

Operating leases and capital leases are subject to different tax regulations. An operating lease is effectively a rental transaction because the transactions does not transfer ownership or equity interests to the lessee for a nominal amount and the term does not exceed the expected life of the property. Rental payments under an operating lease are expensed as paid. A capital lease is a financing arrangement to purchase the leased property. Assets acquired under a capital lease are treated as if the lessor has transferred title to the lessee and therefore, are subject to capitalization rules, depreciation and may even be eligible for section 179. If you have any questions about this, please contact us.