Operating Lease versus Capital Lease
Posted by David Rhoads on Thu, Nov 03, 2011 @ 05:00 PM
S
o now the question becomes do I finance my equipment purchase with an operating lease or a capital lease?
The answer depends on how you want to manage cash flow. Think of an operating lease as a rental agreement. You as a business owner don’t own the equipment and can expense your lease payments. This allows you to lower your overall tax burden and keep the equipment off your balance sheet — a.k.a. “off balance sheet financing.”
A capital lease on the other hand can be thought of as a 100% 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.