With production agriculture being caught in another economic downturn, what should or can farmers do if they need to acquire tractors, other equipment or pivot irrigation units.
One option is to lease equipment rather than to purchase it, AgDirect's Wisconsin territory manager Calvin Sipes of Spring Green told attendees at the 2016 educational program and annual meeting of the Outagamie County Forage Council. His company works directly with agricultural equipment dealers of all company lines.
Although the federal Section 179 tax provision has been restored and attractive tax depreciation rates still apply, the squeezing of operating margins makes thought of leasing something farmers should consider, Sipes suggested.
With a lease, the user agrees to pay rent on the equipment for a specific amount of time and does not have to make a down payment, Sipes said. At the end of that agreement, the lessee usually has an option to buy the unit at its residual value or to return it.
The lessee assumes the responsibility for insurance, maintenance, any taxes and other ordinary costs of ownership, Sipes said. At the end of the lease, the user is expected to return the equipment in good condition, minus normal wear and tear.
If the remaining payoff is less than $500,000, there is no early termination fee for trading in equipment and the trading equity can be used as a first payment on a new lease, he said. If the lessee doesn't like or no longer needs the equipment, he said arrangements can be made to pay off the lease early or to have another lessee assume the remainder of the lease.
Reasons for leasing
A major reason for leasing is that rental payments would usually be lower than those on the interest and principal for a loan, Sipes said. With a properly structured lease, the lease payments can be fully deductible on taxes as an operating expense while also providing faster depreciation on equipment than is allowed with purchasing.
Leases can also improve cash flow, free capital for other uses on the farm, standardize the replacement cycle on equipment and even serve as a estate planning tool by transferring the equipment to a new generation at the end of the lease, he explained.
Buying equipment at a reduced rate is a popular practice, Sipes said. 'We do a lot of that.'
Types of leases
For tax purposes, leases can either be classified as a true lease or a conditional sales lease. A true lease allows a full deduction on the payments as an operating expense, while a conditional sales leases allows depreciation of the leased unit as an asset, Sipes said.
A true lease offers a choice of fixed purchase option or a purchase of renew only agreement. An FPO allows surrendering or walking away at the end of the agreement; purchasing at the residual price; or trading the equipment at any time. A PRO does not include the option of surrendering, but it allows purchasing and trading while also creating a higher residual value.
The residual types that are offered with a conditional sales lease are a $1 buyout provision and a purchase at termination. The $1 buyout is in effect a purchase of the equipment with accompanying tax privileges, while the PUT is also a form of purchase that's similar to a term loan with a balloon payment, Sipes explained.
AgDirect works with equipment that's up to 10 years old and provides an AgDirect Mobile app that is designed to help equipment dealers compare lease and loan options with their customers, Sipes said.
More information about AgDirect's services is available at www.agdirect.com website or by calling 1-888-525-9805.