• Home /
  • Blog /
  • Operating Lease vs. Capital Lease

Operating Lease vs. Capital Lease

According to the ELFA- The Equipment Leasing and Finance Association’s monthly report, “year to date, cumulative new business volume increased 10 percent compared to 2014” and the overall new business volume for May 2015 was $7.1 billion.

capital-lease-or-operating-lease

Leasing is becoming a very popular way for businesses of every size to keep up with technology. Because leases usually don’t require a substantial down payment, it allows the business owner to hold on to his cash in a period of slow and volatile economic growth.

Some equipment leases allows the business owner to trade in the equipment he has, or trade up if there is a major change in technology during the lease period.

Section 179 to the tax code is something you hear a lot about when talking about equipment leasing. This is the section that details how much the business owner is allowed to deduct. “Despite a recent decrease in the deduction limit from $500,000 to $25,000, Section 179 is still a preferred financial strategy for a wide range of businesses.” Wrote

Business News Daily in a June 10, 2015, article.

There are mainly two types of equipment leasing: Operating lease and finance (capital) lease.

Operating Lease
• This structure allows a business to use the equipment for a predetermined length of time without ownership.
• Lease period is usually shorter than the life of the equipment.
• At the end of the lease, the lessor is the one who can recoup the cost by reselling the equipment.
• Equipment under operating lease cannot be listed as an asset. It’s accounted for as a rental expense.
• The equipment is not an asset, but is not a liability either.
• The equipment qualifies for tax incentives.

“With the prevalence of leasing, new accounting regulations from the Financial Accounting Standards Board (FASB) require companies to reveal their lease obligations to avoid the false impression of financial strength. In fact, according to recent reports, all but the shortest-term equipment leases must now be included on balance sheets. So while leased equipment does not have to be reported as an asset under an operating lease, it’s far from being free of accountability.” Writes the same article.

Offered rates are all over the board, depending on other factors as well, but the average APR for an operating lease is 5% or lower. The average lease period is between 12-36 months.

Finance lease

Finance lease, or as it is called Capital Lease, is in some ways similar to operating lease; the lessor owes the equipment and the business pays a monthly payment, but it differs from it because the lease is recorded as an asset, increasing the business value and its liability. Used by large companies such as major retailers and airlines, it allows the company to:

• Claim both the depreciation tax credit on the equipment and the interest expense for the lease itself.
• The business may choose to purchase the equipment at the end of the lease.

The APR for a capital lease is higher. After all the business gets an advantage, doesn’t it? Standard rates are currently between 6-9 percent, and the average lease term is from 24 to 72 months.

Resources

http://www.businesswire.com/news/home/20150622005326/en/Equipment-Leasing-Finance-Association%E2%80%99s-Survey-Economic-Activity#.VZ7XlPlVhBc
http://www.businessnewsdaily.com/8083-equipment-leasing-guide.html

(Visited 30 times, 1 visits today)
Share Article

Leave a Reply

Your email address will not be published.