A lease is a contractual agreement that allows a party (the lessee) to use an asset in exchange for payments to the owner (the lessor).
After recent accounting rule changes, most leases will be shown as a liability or possibly an asset on a local government entity’s balance sheet. The distinction between financing leases (or capital leases) and operating leases (or true leases) has largely been eliminated for accounting purposes.
However, the notion of a financing lease, as opposed to an operating lease, is still a relevant concept under federal tax law. Under federal tax law, a financing lease typically provides for periodic rent payments that are effectively principal and interest payments, with the interest component specifically identified, and further provides for a bargain purchase option by the lessee at the end of the lease. Financing leases are often marketed to local governments in connection with the sale of equipment, such as energy savings equipment.
