Companies often choose to lease rather than buy equipment. Sometimes this is done to gain tax advantages or to hide assets that would otherwise appear on their financial statements. To dissuade companies from abusing the lease-versus-own option, accounting rules require companies to classify certain leases as capital leases—if they have certain characteristics. This makes them more similar to owned assets.A lease must be classified as a capital lease if: The life of the lease is 75% or more of the asset’s useful life. The lease contains a purchase agreement for less than market value. The lessee gains ownership at the end of the lease period. The present value of lease payments is greater than 90% of the asset's market value. Accounting for a capital lease involves four steps. First, record the present value of all future lease payments as the cost of the lease. Then, record only the interest portion of each payment as an expense. Next, depreciate the recognized cost of the asset over the life of the payments. And finally, recognize the disposal of the asset at the end of its useful life.