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An important accounting and income tax concept having to do with the determination of whether a lease (usually of personal property, but sometimes of real property) is a true lease, or whether it is a disguised lending arrangement. The operating lease is the true lease, and 100 percent of the payments are treated as expenses for accounting purposes and tax deductibility purposes.Sometimes called an off-balance sheet lease,meaning not that the lease is hidden or disguised,but it appears on the profit and loss statement rather than the balance sheet. Contrast with capital lease.In order to qualify as an operating lease,the transaction must meet the following requirements:
• The lease term is less than 75 percent of the estimated economic life of the equipment.
• The present value of lease payments is less than 90 percent of the equipment's fair market value.
• The lease cannot contain a bargain purchase option (i.e., purchase option for less than the fair market value).
• Ownership is retained by the lessor during and after the lease term.