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10 Ways to Cut Iron Costs
Leasing machinery was in vogue the last time corn was hovering around $4 a bushel and the federal government wasn’t so magnanimous with depreciation write-offs. For good reason. If you lacked the support from your banker to purchase machinery, leasing offered a viable alternative.
That alternative is attractive again, points out Larry Gearhardt, director of tax schools for farm advisers at Ohio State University. Proof of that began in 2013, when he started receiving cold calls from companies encouraging him to lease equipment. He says that is a pretty strong indicator the leasing industry believes farmers are looking for financing alternative.
Generally, if the money is available, it’s easier to purchase than to lease. That’s because ownership enables you to take advantage of Section 179 depreciation.
Capital isn’t as flush these days, though. Depreciation amounts are a fraction of those in the past. As such, total costs of a purchase vs. a lease are tipped in favor of leasing. That’s because the initial expense with a lease is much less than a purchase, Gearhardt points out.
Annual lease payment can run about $10,000 less than purchase agreements, says Nick Smith of Equipment Technologies.
There are myriad factors to consider when debating a lease over a purchase. Along with tax implications, there are loan or lease terms, rental or custom-hire rates, size of operation, and time lines. The greater the value involved, the greater the attention to the details and implications.
For instance, the terms of an arrangement need to be well understood. For the IRS, a finance lease is treated, essentially, as an installment loan. On the other hand, an operating lease (or a true lease) leaves real ownership in the hands of the leasing company until the last payment is made.
Regarding taxes, Kevin Dhuyvetter at Kansas State University says the goal should be to try to pay the lowest rate possible rather than no taxes.
“Leasing is just another way of financing equipment. There’s not a huge advantage or disadvantage to leasing. It’s just different,” he points out.
Dhuyvetter and Gearhardt say a method of estimating machinery costs over an extended time is vital to making a decision. They encourage you to get a second opinion before making a decision.
“We sometimes forget to think about possible outcomes. That’s where a tax consultant or tax adviser can help,” Dhuyvetter says. “Get another set of eyes to help think through potential unintended consequences of the decisions.”
Click on the links to find 10 ways to save:
- Balance ballast to choke field fuel guzzling
- Slash tillage passes
- Pocket higher trade-in dollars by shedding steel
- Cut repair costs with reman parts
- Practice planned preventative maintenance
- Shrink tech spending by going used
- Cover some expenses with expensing
- Turn off irrigation before the crop is made
- Desiccate drying costs with dryeration
- Throttle fuel costs with tire inflation