Important Tips for operating Leasing for Your Business

An operating lease is defined as a leasing agreement that allows the utilization of the leased assets but does not transfer its ownership rights to the lessee. It is an off the balance sheet account and is treated like a rent expense on regular basis. In the lessor’s books the asset is recorded as an asset that is generating rental income. The depreciation is also carried out in regular basis. Operating Lease allows the lessee to have tax incentives as it is not considered an asset. It also provides a means of improving financial and accounting ratios of the company.

In the corporate world, there are two basic forms of leasing. One is called the capital lease and the other is operating lease. The capital lease has the following conditions:

1. It is non-cancelable
2. The ownership of the asset is transferred after the lease period
3. The lease agreement has bargain or purchase option
4. The duration of the lease agreement is equal to or more than 75% or greater of the operational life of the asset
5. Operating lease negates all the above standards.

For businesses new or existing t is very important to know the difference between leasing options and carefully analyze which is most suitable for their requirements and needs. Some important advantages of getting into an operating lease include the following:

1. There are no ownership costs associated with the operating lease as the ownership is not transferred to the lessee at the end of the period. Hence paying taxes, licensing or maintenance fees are no longer the hassle for the lessee. It rather provides the lessee the opportunity to lease out something newer after the completion time.
2.  The down payment required for an operating lease is very low as compared with capital lease. In most instances it does not require the down payment at all. So the lessee can get a better bargain with lesser money.
3. Because the operating lease is for shorter duration with no obligation to own the asset, the lessee can choose to upgrade his office equipment after the completion of the lease. He can therefore have the latest technology and machinery for his business purposes.
4. Operating lease is like making rental payments. So book keeping for the lessee is much easier and convenient with no liabilities or assets and only changes in the expense account. It does not have to account for depreciation as well.