# Operating Lease

Canonical URL: https://fundmyequipment.com/learn/glossary/operating-lease/
Last modified: 2026-05-29T19:39:17+00:00
Type: efin_glossary

## Summary

A lease that does not transfer ownership risks/rewards. Off-balance-sheet under pre-ASC 842 accounting.

## Content

An operating lease is a lease where the lessor retains the equipment's residual risk and economic benefits. The lessee uses the equipment for the lease term and returns it (or exercises a market-value buyout) at the end. Under U.S. tax rules, true operating leases let the lessee deduct full lease payments as a business expense. Under ASC 842 accounting rules, operating leases now appear on the balance sheet as a right-of-use asset and corresponding lease liability, but income-statement treatment remains a single straight-line expense.

The most common operating-lease structure in equipment finance is the FMV lease, where the end-of-term buyout is the equipment's then-current fair market value.

Operating leases generally do NOT qualify for Section 179 deduction because the lessee does not own the asset.

Key characteristics

Lessor owns the equipment throughout the term
Term is typically 75% or less of the equipment's useful life
Present value of payments is less than 90% of equipment value
End-of-term buyout is at fair market value (not pre-set bargain)
Lessee deducts payments as expense; lessor takes depreciation


When to use one

Operating leases work well when you want predictable expensing, prefer to avoid residual-value risk, and expect to refresh equipment regularly (technology, vehicles, equipment that obsoletes faster than it wears).

They work less well when you want to build equity in the equipment, prefer maximum first-year tax deduction via Section 179, or know you will keep the equipment well beyond the lease term.

Related

See capital lease for the alternative classification (lessor transfers ownership risk). See tax treatment of equipment leases for deeper tax discussion.