An operating lease, true lease, or tax lease is a tax-motivated equipment lease that allows a company to expense the lease payment or have off-balance sheet financing. The lessor is able to offer rates that are below traditional financing due to accelerated depreciation. For tax purposes, the lessor claims the entire amount of the payment as income and is able to depreciate the equipment. Similarly, a TRAC (Terminal Rental Adjustment Clause) lease offers the same benefits but is specifically for commercial vehicles.
A municipal lease is used by government entities to acquire equipment and real property. Due to of the tax-exempt nature of these transactions, rates are typically lower. Interest income earned is not subject to federal income tax, so the lessor is able to exclude the interest portion of payment from taxable income.