Capital leases, what you need to know

What is a capital lease?

 

When it comes to leasing, think of an operating lease like renting and a capital lease like buying on a payment plan.

With a capital lease, the equipment is treated as if you’ve purchased it. This means it appears on your balance sheet as both an asset (something your business owns) and a liability (a debt). This gives you two key financial benefits: you can claim depreciation on the asset and deduct interest expenses from your taxes each year.

And here’s the best part: when the capital lease ends, you can usually buy the equipment for a small final payment, far less than its fair market value. This makes a capital lease an attractive option for businesses looking to eventually own the equipment they’re leasing.

 

The Financial Accounting Standards Board (FASB) says that a lease must be considered a capital lease if it meets any of these four conditions:

 

  1. The lease lasts for more than 75% of the asset’s expected useful life.
  2. Ownership of the asset transfers to the person leasing it at the end of the lease term.
  3. There’s an option to buy the asset at a bargain price at the end of the lease (as opposed to paying its full market value).
  4. The total of the lease payments, when discounted to their present value, is more than 90% of the asset’s fair market value.

LEASE ADVANTAGES:

Build ownership over time

Every payment you make brings you closer to fully owning the equipment.

Tax Benefits

Depreciation and interest deductions can reduce your tax bill.

Low cost at lease end

You can buy the equipment for a small fee after the lease ends.

LEASE DRAWBACKS:

Higher Payments

Monthly payments are usually higher than a simple rental.

Outdated Equipment

You may not be owning the newest model when your lease ends.

Liability on your balance sheet

The lease shows up as a liability (debt) on your financial records.

Is a Capital Lease Right for You?

 

A capital lease can be a good choice if you want to eventually own the equipment and take advantage of tax benefits along the way. However, if flexibility and lower monthly payments are more important to you, an operating lease might be better.

Not sure which option is right? Get in touch with us—we’re here to help you navigate your options and find the best fit for your business.

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Prior to founding Right Way Medical, Prati held various roles with Apria Healthcare, B. Braun Medical, and Medical Technology Resources, where his final role was Sr. Vice President of Sales and Operations. During his time serving at Medical Technology Resources he was influential in assisting in its acquisition to Medical Specialties Distributor, a company that has since been acquired by McKesson in 2018.

Prati has been involved in various philanthropic organizations including The Make-A-Wish Foundation, A Kid Again, Orphan’s Promise and has served in various board and volunteer roles at Cypress Wesleyan Church (Alton Darby and Dublin campuses) and the Vineyard Church of Columbus.

Josh Prati resides in Powell, Ohio with his wife Christa and two cats, Remey and Molly. He enjoys working out, developing relationships over a home cooked meal, great wine, and is an avid Ohio State Buckeye and Pittsburgh Steeler fan.