What is in this article?:
• For individual farmers, decisions about machinery and equipment are quite often their most financially-impacting.
• Making equipment decisions may appear daunting, but the good news is that farmers have several sound options when considering farm equipment needs.
Other ownership expenses
In addition to the equipment itself, cost of ownership includes maintenance and repair, winter storage, insurance, and property taxes. If you have not properly planned for these additional costs associated with ownership, they can potentially exhaust your capital reserves.
Larger farmers that more fully utilize their current machine may see fewer advantages to renting, but as their farm size increases, many choose to add additional capacity with a rental machine.
Even when the economics are considered less advantageous, there are still better ways to deploy capital in investments that appreciate in value versus depreciate, such as the combine.
All businesses have a limit to the amount of capital they can deploy. Farmers should ask themselves — Is a combine the best use of my capital, or are there other more pressing or better uses? Some of those uses can include assets that will appreciate, rather than depreciate, such as more advanced farming technology which can increase your productivity and efficiency, grain handling or storage, additional land, or equipment that is more fully utilized, such as tractors.
The deciding factor we hear most often when farmers decide to rent rather than purchase is the cash and cost savings.
As a general rule, renting is significantly less per acre than owning, sometimes offering a 15-50 percent savings over the total cost of ownership.
Renting provides substantial cash flow benefits, especially in the first year when a purchase down payment plus loan payments can put a serious dent in available cash and/or reserves. It offers predictable costs with no surprises.
A rental model frees the farmer from concerns over catastrophic failures and ongoing maintenance headaches. The most economic harvest solution that incorporates the latest, most advanced combine without the overwhelming cost of purchasing a high-end machine is a rental model that benefits from much higher utilization of these expensive assets than a farmer can get on his own.
Tax rules such as Section 179 and bonus depreciation enable you to deduct a sizable amount for farm equipment purchases. Despite the tax advantages of ownership made possible by IRS accelerated depreciation rules (MACRS and Section 179), producers should keep in mind that the benefit is limited to the time value of money
The net tax deduction over the ownership period on the machine is ultimately limited to the depreciation on that machine — nothing more, nothing less
We find producers are often surprised on this important point. When the producer sells the machine, he will face a tax hit from the depreciation recapture rules of the IRS (recapture can be avoided in a like-kind exchange but the accelerated depreciation benefit on the replacement machine is greatly reduced).
For a producer spending $325,000 on a Class 7 combine that he plans to use for 5 years, the accelerated depreciation tax benefit of MACRS equates to only a 3-4 percent improvement in the cost of ownership. With Section 179, that benefit can jump to 10-12 percent which, while meaningful, is generally not enough to offset the lower cost of renting.
Rent payments will continue to be 100 percent deductible as ordinary operating expenses. We always suggest that farmers consult with their accountants when negotiating their purchases to ensure that they are viewing it from the perspective of their entire holdings and the planned use of the asset.
Given that the savings from a combine rental approach over time generally eclipses the after tax cost of ownership, we encourage producers to leverage section 179 deductions on other assets.
Acreage and harvest equipment efficiency/usage
A newer combine will likely be much more efficient than an aging one, and renting affords you the opportunity to take advantage of that benefit at a relatively low cost. In fact, last season, one of our customers in Texas replaced the combine he owned with a rental combine from us and was able to reduce his harvest cycle time from 30 days to 19.