As you shop around for equipment to lease—whether lab instruments, imaging systems, or industrial tools—you’ll likely run into a few different types of leases. At first, the details might not seem all that important, as long as you’re getting the right equipment on reasonable terms. But if you’re reading this, you’ve probably started digging into the specifics—trying to understand which lease structure actually makes the most sense for your business. So, should you go with an operating lease or a capital lease?
The difference matters. Each lease type impacts your company’s balance sheet, cash flow, and tax strategy in distinct ways.
Operating leases—often preferred by labs, startups, and fast-moving companies—are built for flexibility. You use the equipment for a set period, make fixed payments, and return or upgrade it at the end of the lease term. Capital leases, now called finance leases under GAAP and ASC 842, function more like long-term purchases. They come with ownership-like responsibilities and benefits.
In this guide, we’ll break down the key differences between operating and capital leases, explain how lease accounting works under the latest standards, and help you decide which lease structure aligns best with your financial strategy.
What is an Operating Lease?
An operating lease is a short- to mid-term lease agreement that gives a lessee access to equipment without the ownership risks or long-term financial commitment of a capital lease. The lessor retains ownership of the asset, and at the end of the lease term, the lessee typically returns or upgrades the equipment.
Unlike a capital lease, this structure is designed for flexibility and cost efficiency. Operating lease payments are treated as operating expenses on the income statement, and are generally tax-deductible. Under ASC 842, operating leases must appear on the balance sheet, but the impact is minimal compared to capital leases.
Operating leases are ideal for businesses—especially in biotech or life sciences—with evolving equipment needs and a focus on cash flow and adaptability.
Learn more about how operating leases work.
What is a Capital Lease?
A capital lease—now called a finance lease under GAAP and FASB’s updated lease accounting rules—transfers many of the ownership rights and responsibilities to the lessee, even if the lessor retains legal title.
Unlike an operating lease, a capital lease is treated more like a purchase. The leased asset appears on the company’s balance sheet as a fixed asset, along with a lease liability equal to the present value of the lease payments. Over the lease term, the lessee records both depreciation expense and interest expense, which can help reduce taxable income.
Capital leases often include a bargain purchase option, allowing the lessee to acquire the asset at the end of the lease—making them a good fit for long-term equipment use, especially when the business plans to retain the asset for most of its useful life.
Learn more about how capital leases work.
Operating Lease vs. Capital Lease: Key Differences
While both operating leases and capital leases (also known as finance leases) allow businesses to access equipment without a full purchase, their accounting treatment, ownership rights, and financial impact are very different.
Here’s how they compare across key areas:
1. Ownership of the asset
- Operating lease: The lessor retains ownership. The lessee uses the asset temporarily and typically returns or upgrades it at the end of the lease term.
- Capital lease: The lessee assumes most of the risks and rewards of ownership, often gaining the option to purchase the asset—sometimes at a bargain price—when the lease ends.
2. Balance sheet and accounting rules
- Operating lease: Under ASC 842, the leased asset is recorded as a right-of-use asset, with a corresponding lease liability, but operating lease payments are reported as operating expenses on the income statement.
- Capital lease: The asset is recorded as a fixed asset, and the lease as a long-term liability. The lessee recognizes depreciation expense and interest expense—just like with an owned asset.
3. Tax treatment
- Operating lease: Payments are fully tax-deductible as operating expenses, offering straightforward cash flow benefits.
- Capital lease: The interest payments are tax-deductible, and the lessee may depreciate the asset over its useful life, reducing taxable income over time.
4. Lease term and asset life
- Operating lease: Best for short-term leases or when the equipment may become obsolete quickly. It’s commonly used when the lease period covers less than 75% of the useful life of the asset.
- Capital lease: Typically spans most of the asset’s economic life. If the present value of the lease payments equals 90% or more of the asset’s fair market value, it’s often classified as a capital lease.
5. Flexibility
- Operating lease: Offers more flexibility to upgrade or return equipment. Better suited for small businesses or research labs needing agility.
- Capital lease: Better for businesses with long-term plans and stable equipment needs that align with ownership goals.
Accounting Differences Between Operating & Capital Leases
Under current accounting standards (ASC 842 and IFRS 16), both operating leases and capital leases (also known as finance leases) must appear on a company’s balance sheet—but their financial impact is handled differently.
Capital Lease (Finance Lease) Accounting
A capital lease is treated like a financed purchase:
- Balance sheet: The lessee records a leased asset and a lease liability equal to the present value of the lease payments.
- Income statement: Each lease payment is split into:
- Depreciation expense: Applied to the asset over its useful life.
- Interest expense: Applied to the liability, gradually decreasing over time.
- Tax treatment: The lessee may deduct interest and depreciation, reducing taxable income.
Operating Lease Accounting
Operating leases follow a different accounting method:
- Balance sheet: A right-of-use asset and a corresponding lease liability are recorded, but the asset is not considered a fixed asset.
- Income statement: Lease payments are recorded as straight-line operating expenses over the lease term.
- Tax treatment: Payments are fully tax-deductible as operating lease payments, simplifying disclosures and accounting.
While both lease types require financial disclosures and impact financial statements, the accounting treatment of capital leases creates additional complexity due to ownership rights, interest payments, and depreciation. For labs and research-driven companies focused on flexibility and cash flow, an operating lease can be the more practical solution.
Tax Implications of Operating vs. Capital Leases
Choosing between an operating lease and a capital lease isn’t just about cash flow or ownership—it also affects your company’s tax strategy.
Capital Lease (Finance Lease) Tax Benefits
- Depreciation: The lessee records the leased asset on the balance sheet and depreciates it over the useful life of the asset. This creates a depreciation expense that reduces taxable income.
- Interest deductions: Each lease payment includes an interest component, which is tax-deductible.
- Asset ownership benefits: At the end of the lease term, the lessee typically owns the asset, allowing continued depreciation and tax benefits beyond the lease period.
These benefits make capital lease payments attractive for businesses investing in long-term assets—especially when maximizing deductions is a priority.
Operating Lease Tax Benefits
- Operating expense deductions: Operating lease payments are fully tax-deductible as operating expenses on the income statement, simplifying lease accounting and tax filings.
- No depreciation tracking: Since the lessee doesn’t own the asset, there’s no need to manage depreciation or interest payments.
- Cash flow-friendly: Lower upfront costs and regular lease payments help small businesses preserve working capital while still benefiting from tax-deductible expenses.
Bottom line? If your business wants tax savings tied to depreciation and ownership of the asset, a capital lease may be more strategic. If you prefer simplified accounting, lower risk, and consistent expense deductions, an operating lease can be the better option—especially for short-term leases or rapidly evolving industries like biotech.
Which Lease Type Is Best for Your Business?
The right lease structure depends on your company’s goals, financial situation, and how long you plan to use the equipment.
Choose an operating lease if:
- Flexibility matters: You expect to upgrade equipment regularly or only need it for a defined period of time.
- You want to preserve cash flow: Operating leases typically require lower upfront costs and offer tax-deductible lease payments.
- Ownership isn’t the goal: You want access to the asset without the risks of ownership or the burden of long-term depreciation.
Operating leases are especially attractive for labs, startups, and research organizations working in fast-moving sectors where equipment becomes outdated quickly. Learn more in our guide to operating leases.
Choose a capital lease (finance lease) if:
- You plan to own the asset: The equipment is core to operations and will be useful for most of its economic life.
- You want to build equity: A capital lease puts the asset on your balance sheet and gives you ownership rights at the end of the lease.
- Tax advantages are a priority: You want to deduct both depreciation and interest expense over time.
If your strategy includes building long-term asset value, and you’re equipped to manage maintenance and insurance, a capital lease may make more sense—particularly for durable, high-cost equipment.
Final Thoughts: Choose the Lease That Aligns with Your Strategy
Understanding the differences between an operating lease and a capital lease is essential when planning equipment purchases, managing cash flow, and building out your financial strategy. Each lease type has unique accounting treatment, tax implications, and operational responsibilities—and the best choice depends on your business goals.
- If you value flexibility, lower upfront costs, and want to avoid the risks of ownership, an operating lease may be your best bet.
- If long-term use, asset control, and eventual ownership are your priorities, a capital lease (or finance lease) could be a smarter fit.
At Excedr, we specialize in operating leases because they provide biotech and life science companies with what they need most: access to cutting-edge equipment without long-term ownership obligations. That means more cash flow, faster upgrades, and fewer headaches—so your lab can stay focused on the science.
Not sure which lease is right for you? Explore our operating lease guide, or get in touch to learn how we can support your lab’s growth.