Equipment leases look like rental contracts but they aren't — not fully. The structure of the lease determines whether you really rent the equipment or whether the lease is actually a disguised purchase, with meaningful consequences for tax treatment, accounting under ASC 842, and what happens when the lease ends. Most disputes in equipment leasing don't come from non-payment. They come from end-of-term: automatic renewals, evergreen clauses, return-condition standards and forced purchases.
What is a Operating vs Capital Lease?
An equipment lease in the US is a contract under which a lessor allows a lessee to use specific equipment (vehicles, manufacturing, IT, medical) for a fixed period in exchange for periodic payments. Leases are classified for accounting under ASC 842 as either operating or finance (formerly 'capital') leases; for tax under IRS Revenue Procedure 2001-28 as either 'true leases' or conditional sales. The Uniform Commercial Code Article 2A governs the underlying commercial relationship in nearly all US states. Classification affects ownership of the equipment at end of term, tax deductibility, and balance-sheet treatment.
Red flags to watch for
Evergreen clauses with long notice windows are the biggest single source of equipment-lease disputes. Miss the window by a day and you are locked in for another year.
FMV options are a core true-lease feature, but if the lessor unilaterally sets FMV, it can push the figure higher and force you to buy on their terms.
Strict return standards trigger refurbishment invoices at lease end. Standards should match the ordinary wear expected over the term.
Standard in finance leases, but combined with a warranty disclaimer it can force you to pay even when equipment doesn't work. Third-party manufacturer warranties should be passed through.
A nominal purchase option means this is not a true lease — it is a finance arrangement. The IRS and FASB will treat it as a purchase regardless of the contract heading.
Triple-net style equipment leases make the lessee responsible for everything. Caps and limits on pass-throughs protect cash flow.
Indemnity for the lessor's own conduct is commercially aggressive and may be unenforceable in several states under anti-indemnity statutes.
Your legal rights
US equipment leases are primarily governed by Article 2A of the Uniform Commercial Code (adopted in all states except Louisiana), which sets rules on formation, finance leases, remedies and consumer protection for consumer leases. The 'true-lease' vs 'conditional sale' distinction follows Revenue Procedure 2001-28 (IRS) and case law focused on residual value and purchase options. ASC 842 (effective for public companies since 2019 and private since 2022) requires most leases on the balance sheet. Consumer leases are also subject to the federal Consumer Leasing Act (15 U.S.C. §§1667–1667f) and Regulation M. State commercial codes and anti-indemnity statutes (e.g. in construction contexts) may void one-sided indemnities. Federal courts and state courts enforce leases subject to the UCC and general contract principles.
Questions to ask before you sign
- 1Is this an operating or finance lease under ASC 842 — and how does that fit my accounting?
- 2What is the end-of-term option — return, renew, purchase at FMV, purchase at fixed price?
- 3If FMV, how is fair market value determined and can I appoint an independent appraiser?
- 4What are the return condition standards, and how is wear measured?
- 5What notice must I give to avoid automatic renewal, and by when?
- 6Is this a 'hell or high water' lease, and do manufacturer warranties pass through?
- 7What maintenance, insurance and tax obligations fall to me, and are they capped?
Disclaimer: This guide is for educational purposes only and does not constitute legal advice. Contract law varies by jurisdiction and individual circumstances. Always consult a qualified legal professional before making decisions based on this information.