Should you purchase or lease that new piece of farm equipment? It's a question that's on the minds of many farmers, especially this time of year, and there are advantages and disadvantages with either strategy, says Bob Lisec, economist with the Alabama Cooperative Extension System.
The benefits of buying equipment, says Lisec, begins with the fact that it's yours — you can do with it whatever you want, and the hours of operation don't matter. “In addition, the equipment usually will be equipped the way you wanted it for your particular operation. If it's not equipped, you can customize it yourself,” said Lisec at the recent meeting of the Alabama Fruit & Vegetable Growers Association in Gulf Shores.
Another primary benefit of buying equipment, he adds, is that a purchase qualifies for the Section 179 depreciation write-off. “Also, when you purchase a piece of equipment, you can sell or trade it whenever you want to. You're not committed to holding the equipment for a specified number of months,” says Lisec.
But there also are disadvantages to buying equipment, he says. “You're going to have to come up with the money to make the purchase, or you'll need a plan to pay for the equipment. If you have money or CD's sitting at home, you'll just have to convince your wife that it's the right thing to do. Otherwise, you'll have to convince your lender that you really need this piece of equipment,” says the economist.
Another disadvantage, notes Lisec, is that if you used the maximum allowed Section 179 depreciation in the first year of ownership, the depreciation in years two through eight might not amount to much. “You won't get quite as good a farm expense out of the purchase if you take the maximum depreciation in that first year,” he says.
Turning to leasing, Lisec says a big benefit is that it's generally easier to obtain lease money from the lender by including it in the operating note. “In addition, the entire lease amount is deductible each year from your taxes, no questions asked.”
A grower also may be able to get a better piece of equipment through leasing as opposed to buying, he says. “A leased piece of equipment may have options that you might not could have afforded if you were buying the equipment. Also, you'll probably be able to get new equipment more often through leasing.”
In many cases, says Lisec, you'll have the option to purchase the equipment at the end of the lease period, and the price could be 60 to 70 percent of the appraised value. “At that point, you can set it up on depreciation. You also can take the Section 179 depreciation at that time. It's perfectly legal, and you can get a pretty good write-off. So, leasing does have some tax advantages.”
A disadvantage of leasing, he says, is that there's always an “hours” restriction on the equipment. “If the leased equipment is your primary tractor or some type of tillage equipment, you may accumulate more than the specified hours, and you'll end up spending more money.”
Regardless of whether or not you like or need the leased equipment, you'll probably be stuck with it for from three to five years, says Lisec. “If you haven't asked the right questions at the beginning of the lease agreement, you might be stuck with a piece of equipment that doesn't do the job that you need for it to do. In cases such as this, you might have to buy your way out of the lease, and that becomes expensive.”
Another consideration, he says, is that the leased equipment “really isn't yours. It's leased, so you can't borrow money on it or use it as collateral. Also, you can't sell or trade it.”