Synthetic Lease

Brief Definition

A synthetic lease is a financing arrangement that allows a company to lease an asset, such as real estate or equipment, while enjoying the tax benefits of ownership.

Further Explanation

A synthetic lease is a financing arrangement that allows a company to lease an asset, such as real estate or equipment, while enjoying the tax benefits of ownership. In a synthetic lease, the lessee (the company using the asset) can claim the asset on its balance sheet as an operating lease, which keeps the asset and associated liabilities off the balance sheet. However, for tax purposes, the lessee is considered the owner and can claim depreciation and interest deductions.

Example:
Imagine a company needs a new office building but doesn’t want to show a large liability on its balance sheet. The company enters into a synthetic lease for the building. This way, the lease payments are considered operating expenses, keeping the liability off the balance sheet. However, for tax purposes, the company can still deduct depreciation and interest expenses, as if it owns the building.