Type of lease classified and accounted for by a lessee as a purchase if it meets any one of the following criteria: (1) The lease transfers ownership to the lessee at the end of the lease term; (2) the lease contains an option to purchase the asset at a bargain price; (3) the lease term is equal to 75% or more of the estimated economic life of the property or (4) the present value of minimum lease rental payment is equal to 90% or more of the fair market value of the leased asset less related investment tax credits retained by the lessor.
Operating Lease (true lease):
A lease which is treated as a True Lease, as opposed to a loan for accounting purposes. As defined within FASB 13, an operating lease meet all of the following criteria: (1) lease term is less than 75% of estimated economic life of the equipment, (2) Present value of lease payments is less than 90% of the equipments fair market value, (3) lease cannot contain a bargain purchase option, (4) ownership is retained by the lessor during and after the lease term. The operating lease is accounted for by the lessee without showing the asset or liability on his balance sheet. The lease payments are accounted for by the lessee as an operating expense.
A lease designed to meet the special needs of state and local governments. Since the lessee is a municipality or an organization supporting the government, it is exempt from paying federal income taxes. Thus, the IRS doesn't charge the lessor income taxes on this type of lease.
Equipment Finance Agreement (EFA):
Equipment can also be financed on an Equipment Finance Agreement (EFA). An EFA is basically a loan against the equipment. You will own the equipment and the lender will release their security interest at the end of the finance term.