Final answer:
A capitalized lease is treated as if you have purchased the equipment and appears on your balance sheet as an asset, while an operating lease is treated as a rental expense and does not appear on your balance sheet. However, it may require a larger down payment and higher monthly payments compared to an operating lease.
Step-by-step explanation:
When leasing a big purchase, such as equipment, it is important to determine whether it is a capitalized lease or an operating lease. A capitalized lease is treated as if you have purchased the equipment and it appears on your balance sheet as an asset. On the other hand, an operating lease is treated as a rental expense and does not appear on your balance sheet.
The difference between the two types of leases lies in the ownership of the equipment. In a capitalized lease, the lessee assumes ownership of the equipment at the end of the lease term, while in an operating lease, the lessor retains ownership and the lessee only has temporary use of the equipment.
One advantage of a capitalized lease is that it allows you to depreciate the equipment and deduct the depreciation expense from your taxable income. However, a capitalized lease may require a larger down payment and higher monthly payments compared to an operating lease.