The Farmer’s Dilemma
Many people do not make the connection with farmers being businessmen, but in fact they are some of the most knowledgeable business minds out there, responsible for large amounts of property, facilities, and equipment, and having to find new and creative ways to cut costs and make profit margins without cutting back on the quality they offer to their customers and clients.
Farming equipment can be a large scale purchase, even for the smallest farming locations out there, and farm owners have to look long and hard at the short term gains, long term growth, tax breaks, and consequences, not to mention the depreciation that occurs and the laws on the books designed to keep their livelihood moving the right way.
So is leasing farm equipment a smart choice for the average farmer? In many cases, yes, but with constantly changing variables, the question is asked afresh almost every year.
Some advisers do not recommend leasing because you are being charged for the use of the capital. Rapidly changing technology however, has made leasing more attractive because of the ability to obtain better gear for a lower monthly payment. Some advisers suggest buying the equipment that is not technology driven, while leasing the more high tech options. Since technology is always changing, leasing makes it possible for farm owners to easily upgrade to the next new innovation without major outlay of funds.
It is not at all uncommon to find tractors that are ten, twenty, thirty years old and still in use on farms across the US. Newer high tech farm equipment may actually shut down if something goes wrong with the technology on board, which could interrupt plowing or harvesting, or leave the driver stranded on the highway. What’s worse, it could be a very simple problem that caused the shut down.
A Possible Solution
A good tax management tool is to depreciate the equipment that is owned, but leasing allows for the tax write off of the entire lease. Obviously, however, there is no piece of equipment at the end of the lease. Many times a piece of equipment can be leased for less out of pocket per year than buying it. With current prices up, along with farm income, the price of used equipment is more valuable, meaning a lease may be more economical since the residual cost is higher.
Leasing may also be an option for farmers looking to get into new areas of farming, where it is wise to remain flexible through operating leases. There has been a recent trend of larger clients trading machinery almost every year.
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So, buy or lease? The debate continues, but typically whatever provides for the least amount of out of pocket costs that allows for operations to continue efficiently usually has the final say.
LeaseQ is one of the leading providers of commercial equipment leasing in the country.