Operating lease

An Operating Lease is a type of lease in which the lessor (owner of the asset) retains most of the risks and rewards of ownership, while the lessee merely uses the asset for a specific period. For tax purposes, the asset remains on the lessor’s books, and the lessee cannot claim depreciation, though lease payments are generally allowed as a business expense.

Key Features: Ownership The lessor retains legal ownership of the leased asset. The lessee has the right to use the asset, but does not treat it as owned. Accounting Treatment Lessor: Records the asset on its balance sheet and claims depreciation. Lessee: Records lease payments as operating expenses in the profit and loss statement. Lease Term Typically shorter than the asset’s useful life No transfer of ownership at the end of the lease term

Tax Implications: Lessor: Can claim depreciation and reports lease income as revenue Lessee: Lease payments are deductible as operating expenses, reducing taxable income

Difference from Finance Lease Feature Operating Lease Finance Lease Ownership Retained by lessor Often transfers to lessee Asset on Balance Sheet Lessor Lessee Depreciation Claimed by lessor Claimed by lessee Lease Term Shorter, temporary Usually covers most of asset’s life

Example: A company leases office equipment for 3 years under an operating lease: Legal ownership remains with the leasing company (lessor) The lessee records monthly lease payments as expenses At the end of 3 years, the lessee returns the equipment or may renew the lease