A capital lease is a type of lease agreement where the lessee effectively gains ownership of the asset for accounting purposes. This means that the asset is recorded on the lessee's balance sheet as if they own it, along with the corresponding liability for the lease payments. Capital leases typically last for a significant portion of the asset's useful life and often include options to purchase the asset at the end of the lease term. In contrast to operating leases, capital leases are treated differently for tax and accounting purposes. They are often used for expensive assets like machinery or vehicles, allowing businesses to use the asset without a large upfront payment. This arrangement can provide financial flexibility while still enabling the lessee to benefit from the asset's use.