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A Cautionary Tale of Two Leases

Is your leased vehicle an expense, a liability, or a pain in the asset? It all depends on the type of lease.

A capitalized lease is both an asset and a liability How does that work?

Well, if the lease has a “bargain purchase option”, which is a stipulation in the agreement that gives you the right to purchase the vehicle at the end of the lease term, at a cost substantially lower than its estimated fair market value at that time, then you must capitalize it, or, in other words, report the lease as an asset, with an associated liability. 

But… does the lease have a 10% buyout at the end? This does not then constitute a “bargain purchase option”, so you can treat this one, as an operating lease.  

With an operating lease, there’s no option for ownership at the end. You simply pay each month and eventually move on to a new leased vehicle and a new operating lease. The payment of your operating lease, in this case, is a monthly expense on your income statement.

Capital Lease Vs Operating Lease, there’s no right or wrong.

It just depends on your situation. Just be careful to check with your accountant before you sign any papers, since there may be some advantages to keeping a liability off your books.

We’re always here to help as well, so don’t let leasing your vehicle “DRIVE” you to distraction!

Preferred Client Services, professional bookkeepers in Edmonton, AB working as business partners to make a positive difference to your bottom line!