Operating Lease vs. Capital Lease

Many business owners and executives want to know: what’s the difference between an operating lease and a capital lease?

Think of an operating lease as a rental agreement.  As a business owner, you don’t own the equipment but can expense your lease payments.  This allows you to lower your overall tax burden and keep the equipment off your balance sheet — otherwise known as “off balance sheet financing.”

A capital lease is also known as a financial lease or finance agreement.  You cannot expense the lease payments, but you can put the new equipment into your asset base and depreciate the asset to lower your tax burden.  You can also take advantage of IRS Section 179 deductions with a capital lease.

Both types of leases can help you get access to the resources you need to operate more efficiently, conserve your working capital and not impact your bank lines of credit.