In simplified terms, there are two major types of leases:

	Finance (often called full-payout) leases and
	Operating (non full-payout) leases.

The definitions of each type are not precise and further depend on whether one is analyzing the lease from an economic, financial, accounting or tax perspective. Distinguishing finance leases and operating leases for financial reporting purposes are not the same as those used by the tax specialist for tax purposes. Thus, it is important to understand the context in which the terms are used if there is to be effective communication among parties.

Finance Leases:

Finance leases provide the lessor with full recovery of its investment and a reasonable profit (return on investment) over the initial non-cancelable lease term. In this type of lease, the lessor (Citibank®) retains ownership of the equipment but transfers to the lessee (Customer) substantially all of the risks and rewards of ownership of the asset. The lessee is responsible for the insurance, registration and maintenance of the equipment. Back

Operating leases:

	An Operating lease may be defined as a lease other than a finance lease. An operating lease is one that has the following characteristics:
	There is no automatic transfer of ownership of the equipment at the end of the lease period.
	There is no bargain purchase option available to the lessee.
	The tenor of the lease is less than 75% of the economic useful life of the equipment.
	The minimum lease payments over the lease term are such as to secure for the lessor the recovery of his capital outlay plus a market return on funds invested. Back

Reasons to Lease

There are various possible benefits to leasing. These may include:

	Improved Cash Flow.
	Preserving borrowing capacity.
	*Optimizing tax benefits.
	*Off-balance Sheet financing.
	Meeting covenant restrictions.
	Increase operating flexibility.

* Contact your tax counsel when making decisions that may impact your tax treatment.