Lease
A lease is an agreement under which the original owner of property permits someone else to use it. The original owner is the lessor and the user is the lessee. There are many kinds of leases and subtleties to lease contracts, but the major distinction to be aware of is the difference between operating and capital leases.
An operating lease is similar to a rental contract: The lessee pays fees for the life of the lease and simply uses the goods (e.g., a computer system). The lessee reports these costs as operating expenses (and thus lowers taxes in this way), but takes no depreciation expense. The lessor (owner), however, can claim depreciation expenses and take tax benefits. When the lease is over, the lessee surrenders the property (or renews the lease, or perhaps has an option then to purchase outright). Operating leases differ from rental contracts, primarily in that leases are more binding (have bigger penalties for early canceling), and usually cover longer terms. An operating lease generally covers a time period significantly less than the expected life of the leased goods.
Capital leases are more like financed purchases, that is, the lessee may immediately gain some of the benefits of ownership, such as charging depreciation expense (and taking tax benefits from that), and recognize the asset on the balance sheet as a capital asset. In the United States, the distinction capital and operating leases is based on the Financial Accounting Standards Board, Statement 13 (See FASB 13)
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