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The Difference Between A Capital Lease and An Operating Lease

Guest post by: Gary Barzel

Article Overview: Leasing equipment instead of purchasing it can be a windfall for cash strapped small businesses owners. But, with so many kinds of leases available, how can you choose the right one for your business? Here is an explanation of how a capital lease and an operating lease differ.

The Difference Between A Capital Lease and An Operating Lease

Leasing equipment instead of purchasing is a good option for small business owners who are pressed for cash. Instead of taking loans to buy equipment, they can lease equipment and earn tax benefits at the same time. The financial benefits vary according to the type of commercial lease taken, either a capital lease or an operating lease. A capital lease gives immediate tax benefits to the business that takes the equipment, or "lessee." The lessee can take deductions for depreciation expenses, as well as for the interest on lease payments. Once the lease period has ended, the lessee gains ownership of the equipment. In many ways, using a capital lease is like buying on payment plan.

By contrast, an operating lease seems less beneficial to the lessee. The company that owns the equipment, or "lessor," retains all the tax benefits. When the lease term is up, the lessee can buy or return the equipment, but is not obligated to do so.

Why, then, would a lessee choose an operating lease? The operating lease yields other, hidden benefits. Overall, it allows the lessee to portray a more robust financial picture. That's because the operating lease does not have to be reported on a balance sheet. Operating leases do not create any outstanding loans that must be reported as a liability.

Businesses that want to show a low debt-to-equity ratio are better off with an operating lease. As always, consult with an accountant prior to making financing choices, due to the complexity of tax issues.

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Article Tags: capital lease, equipment leasing, operating lease



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The best time to open a new business - I agree. It depends on the business. However, in some cases there are ways around that if you allow yourself to open up to possibilities and get creative. For example, my husband and I are in the process of beginning a sport's store. We live in a touristy community with a lot of winter sports. There are summer sports here as well, but the winter appears to be the most lucrative. We planned on things coming together in order to take advantage of the winter sport's season, but our ideal lease space was held up by circumstances beyond our control. We are still not in. Lease space is minimal so we have some decisions to make. We could either delay everything until Fall or get very creative around our marketing for the warmer weather sports and start right away. We chose to open up to the possibility that there must be a way to succeed in the off season. Because we chose to think positively and look for solutions that fit what we want to do, all sorts of ideas started coming to us. We are now positive we have a plan that will succeed. So, the answer really depends on the business and your willingness to open up to new creative ideas around it.
I am looking for a Mentor who is a Successful Restauranteur - Hi Evans, An idea for a forum that would be niche focused. My goal is wanting to acquire the expertise of running a highly successful restaurant. Like building any great business I think it would be great if there was One Umbrella resource underwhich I could find a highly successful restauranteur who would be willing to be a Mentor for building a successful restaurant business. A lawyer who understands business and specializes in the restaurant industry and more importantly who would not charge by the hour, But instead on as per completion of a contract basis. A competent CPA/CA who specializes in restaurants and who would be able to offer the right advice in maximzing revenues within the confines of legal parameters. A competent commercial real estate agent who specializes in restaurants and who would assist and advise on acquiring the right locations and also assist in negotiating the Term of Offer Clauses in the Lease Agreement. A competent Tax professional who would advise on maximizing revenues within the confines of legal parameters.
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