Understanding Operating Leases: Definition & Benefits

An operating lease is a type of lease agreement in which a company will use a specific asset for a certain amount of time. The operating lease is a short-term agreement in which the lessee will only have use of the asset and will not have any other rights associated with the property. 

Different Types of Leases

When a company leases equipment, they will often prefer to use an operating lease instead of a capital lease. With an operating lease, they can count the lease expense as an operating expense. This means that they do not have to put it on the balance sheet. With a capital lease, they would end up putting on the balance sheet and it could affect them negatively.

With an operating lease, the business does not get any of the benefits of ownership of the property. With a capital lease, they get to take some of the deductions of the property over its useful life. Since an operating lease is so short-term, they do not get to deduct any of the depreciation. At the end of the operating lease, the company or individual will give the property back to the lessor and the contract will be finished.