Buying Vs. Leasing Farm Equipment

When it comes to buying and leasing farm equipment, there are many aspects that need to be evaluated.

-What are you going to use it for?
-How many hours do you plan on putting into it?
-Will you need it regularly or is this a once a year need?

Before jumping on the buying train or running to leasing one, let us help you evaluate the differences between them and how to decide which will suite your needs best.

In this post, we will cover the differences between buying, leasing and renting equipment to help you decide which option may be the best for you.

Buying Equipment

-Tax benefits if financed through a loan (Find Out More)

-You own it. There are a few different options:

  1. Outright ownership - This occurs when the operator and dealer negotiate a price for the machine and the operator pays cash. In some cases, this "cash" is provided by a third-party lender. There is usually an allowance for a trade-in.

  2. In-house financing - this option involves financing through a dealer-affiliated financing company.

     -Benefits of this option are competitive rates as well as no-interest expense accruing for a period of time, especially for excess supply models.

     -A down side of this plan is that the operator may be required to pay a loan origination fee or other fees that will raise the true cost of financing.

  3. Rollover option - This allows you to acquire new equipment every year or so by agreeing to purchase the equipment with the expectation of trading it in for a newer unit and paying the difference.

     -Benefits of this option are that the operator can get the newest technology and they always have a machine under warranty, which eliminates much of the maintenance costs.

-Owner/farm manager is responsible for making loan, insurance, tax, and non-warranty repair payments.

-Machine will be added to Farm Depreciation schedule (Find Out More)

-Expense can be used alongside Section 179 (it can be claimed only with in the first year of ownership and the amount is not available for subsequent depreciation

-Labor, insurance, repairs and fuel costs are also tax deductible

Leasing

-Regular trade every few years, typically 3-5 years

-Allows for more flexibility with equipment

-Typically offers lower payments

-Easy liquidation

-No commitment to own machinery - return the equipment when you're done with it rather than putting money into when it's not making you money

Lease Options:

  1.True (operating) lease: Series of regular payments, annual or semi-annual. Operator can choose to purchase the machine at price near fair market value or extend the lease. Payments are reported as ordinary expenses on the tax return and are fully deductible. If purchase is made, equipment will be added to depreciation schedule.

  2. Finance (capital) lease: Similar payment schedule as True lease but is treated as conditional sales contact by the IRS. Farmer is viewed as owner and equipment is added to depreciation schedule. Payments are divided into principal and interest portions, with the latter being tax-deductible.

Renting

-Typically lasts less than a year - usually for a few days, weeks or months.

-Good for combines, grain drillers, skid steers and other equipment you will need for a short period of time

-Payment based on number of hours; typically a minimum number of hours is required

-Good way to avoid large ownership costs for infrequently used equipment

-Owner of equipment incurs all costs such as market depreciation, insurance, taxes, and major repairs. These costs are reflected in the rental fees.

-Rental and operating costs are tax deductible.

Stay tuned for the next post in this series, How to Decide between New vs. Used Equipment.

Helpful Links:

http://www.agmanager.info/farmmgt/machinery/MF2953.pdf

http://aglease101.org/DocLib/docs/NCFMEC-05.pdf

 

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Thanks to Fastline for sharing this great info with us! Want more? Check out the Fastline blog!

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