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Leasing vs. buying machinery

11/05/2013 @ 9:19am

Due to high commodity prices and accelerated depreciation, leasing as an option to obtaining iron has been on the back burner. But $5 corn and the threat to greatly reduce, if not eliminate, accelerated depreciation by Congress is making leasing more attractive, particularly if you are looking to free up capital for other investments.  

The best answer for how to finance a purchase is to work through your own details and reach a well-considered best choice. It should reflect your farm’s current situation, history, and forecast. “Leasing is an individual decision,” says Larry Gearhardt, director of tax schools for farm advisers at Ohio State University.

That said, there are some indicators of a shift in the market.

In midsummer, Gearhardt experienced two unusual cold calls encouraging him to lease some equipment.

“That’s the first time I’ve ever gotten calls from leasing companies saying, ‘Check this out, now’s a good time to lease some equipment,’ ” he recalls. “The people who are leasing equipment must be looking for business.”

In his opinion, he suspects that leasing companies may be under pressure due to current very generous expense and depreciation limits. “If you’re in the grain industry, income has been very good over the last several years. We have very generous Section 179 expensing deductions and very high depreciation allowances. I have a feeling that all of those factors, taken together, are leading people to buy equipment rather than to lease equipment,” he says.

In August, Gearhardt participated in a conference for the Land Grant Universities Tax Education Foundation. Directors there were editing the manual for upcoming tax schools in early 2014. For example, they compared the choice to purchase or lease a $100,000 tractor over a 10-year period.

$1,500 more to lease

The result was unexpected. Assuming other factors were the same, over the 10 years, it only cost $1,500 more to lease the tractor than it did to purchase the tractor.

“I thought it was uncanny that there was only a $1,500 difference between the lease and the purchase. Maybe that’s why we’re seeing more purchases,” Gearhardt says. “The amount of money you spend is almost the same; it’s just when it gets done and when you can take the deductions.”

Generally, if the money is available, it’s easier to purchase than to lease. Ownership enables you to take advantage of the Section 179 provision for accelerated depreciation and the separate bonus depreciation option. If the money isn’t available today but the purchase is really important and urgent, then a lease may be the better choice. End cost will be nearly the same, but the initial expense is much less, he says.

Word of caution

Each machinery purchase option – leasing, buying, renting, or hiring custom help – has advantages and disadvantages compared to the others, says Kevin Dhuyvetter of Kansas State University.

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