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Is Ag Leasing an Option for Your Farm Operation?

Date: 
Author: 
Terry Keller
Educational Opportunities: 
Articles
Interests: 
Grain, Dairy, Swine, Beef, Timber, Young, Beginning Farmers
Home > Education & Events > January 2019 > Is Ag Leasing an Option for Your Farm Operation?
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As we continue to navigate another year of tight-margins and depreciating working capital, Ag producers continue to look for new or different ways to help control costs; while remaining competitive and increasing their overall efficiency. When looking to finance new or used equipment, building new livestock facilities or other Ag structures, some producers have taken advantage of the benefits offered by leasing. When looking at a new purchase or construction project, I urge you to evaluate your financing options to ensure that you are selecting the right choice for your situation. Leasing offers some unique financial solutions, and cost-saving benefits when compared to traditional Ag lending.

Lower down payment and less upfront costs. If you are experiencing consecutive years of tightening cash flow and working capital, having to come up with a 20-30% down payment can be difficult. However, in many cases when pursuing a lease financing option the down payment can be much lower than traditional equipment loan financing. Leases provide 100% financing for the value of the asset, with the first payment generally due in advance. Without having to come up with a large down payment, leasing may be an option to consider that will allow you to attain that additional equipment or expansion without sacrificing working capital or cash flow.
 
Flexible terms and payment options. Although not always the general rule in leasing, often times leasing allows the customer (or lessee) and the lessor to create flexible terms and payment options to match your needs. In Agriculture we often deal with seasonality of markets, meaning that there are certain times through the year that you anticipate income. A lease provides the flexibility of structuring the payments around when the income is expected to come in. For example, a grain farmer generally sells crops after Harvest. The lease could be set up to have the payment due on January 1st, with annual payments thereafter to correspond with when they are receiving their income.

Lease payments are generally fixed for the term of the lease. Lease payments are then spread evenly across the duration of the lease term, allowing for easier budgeting, and the ability to split payments across multiple parties or lessees. In comparison, depending on the type of loan product that you have, interest can be fixed or variable, meaning that your payments could change over time – and the ratio of principal and interest could change.

Additional Tax Benefits. When structured accordingly, the IRS does not consider a lease to be a purchase, but rather a tax-deductible expense. Because of this, you can deduct the entire lease payment from your gross income. The equipment write-off is tied to the lease term, which can be shorter than IRS depreciation schedules, resulting in larger tax deductions each year. In comparison a traditional loan purchase, you can only claim a tax deduction for a portion of the loan payment as interest, and the depreciation can be spread out over a longer timeframe. If you are considering leasing as an option for tax purposes, I would encourage you to reach out to your tax advisor to understand how leasing may impact your own operation.

In addition, a properly structured lease can have estate-planning benefits over conventional financing. If you are considering estate planning with the intent to transfer assets from one generation to the next, without incurring any tax implications, leasing may be a solution for you. As an example, say that Bob and Sue Johnson are working toward retirement while transitioning the farm to their two sons who are looking to purchase a new tractor. A partial solution to cut down on potential estate taxes is for Bob and Sue to lease the tractor through their lessor for five years. At the end of the five years, they forgo the option to purchase the tractor – however, the two sons take advantage of the option to buy the tractor from the lessor for the buyout price. Mom and Dad were able to get the income tax deduction, and the sons ended up with a quality tractor at a reasonable price. The main concept of this scenario is because the equipment was owned by the lessor, therefore bypassing the estate of Bob and Sue.

Each producer’s situation is different dependent on their own financial circumstances. These are just a few of the potential benefits that could come into play when considering leasing. During a time of tight margins farmers are continually looking for ways to be creative in helping to preserve working capital, cash flow, while also being cognizant of their desire for growth. When looking to finance equipment, vehicles, a new structure or facility I encourage you to consult with your lender and tax partners to gain insights into whether a lease or a loan is a better option for your operation. They, along with your equipment financing provider will be able to provide you with resources to ensure that you are able to secure the best possible terms for your lease and/or loan. It’s always important to know your options, and understand the advantages of those available to you.
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