Unless an owner-dentist owns the building that houses his or her office, there will be a lease involved. And because there will be a lease involved, the owner of the practice will need to determine whether to go with a capital lease or an operating lease. Understandably, the difference might be lost on some non-accountants, which is why it is important to enlist the aid of a dental CPA from Reliance Consulting, LLC.
Most leases are operating leases. These are the best-understood forms of leases, corresponding to transactions such as renting an apartment or leasing a car without the intention to buy it at the end of the lease period. In terms of a dental practice, however, a dental CPA from Reliance can explain that there are specific accounting effects of capital versus operating leases. Here is a brief definition of both:
- Operating lease – the owner transfers the right to use the property to the lessee, and the property is returned to the owner at the end of the lease period.
- Capital lease – the lessee assumes some of the benefits and risks of ownership, and the signed lease is considered an asset (the property) and a liability (the payments) on a balance sheet.
It is important to distinguish capital versus operating leases because no one wants to run afoul of accounting rules, and the tax implications of each type of lease will differ. A good rule of thumb to remember is that a lease is considered a capital lease if the life of the lease will exceed 75 percent of the life of the building. It might also be considered a capital lease if the lessee intends to purchase the property outright at the end of the lease. Finally, it is a capital lease if the current value of the lease payments is more than 90 percent of the fair market value of the property.
As you can see, there are many complicated factors when it comes to capital versus operating leases. To learn more, contact Reliance Consulting, a premier dental CPA firm serving the Tampa Bay area and beyond.