To Lease, or Not To Lease
By: Jill J. Dunkel
Upcoming scheduled changes in the tax code could make leasing large equipment a more viable option.
As the end of 2013 draws near, many feed yards are looking at end-of-year tax planning and analyzing their business plans for 2014. That can include firming up purchase and renovation decisions as well as finalizing other major costs in their budget.
Those purchase decisions could include big ticket items like feed trucks, loaders or tractors. But is purchasing large equipment the best route to take? Or could leasing be a better option? Possible changes in the tax code could help answer that question.
Brian Mills, tax manager at John Deere Financial, says leasing large equipment may become more popular as current tax laws that favored buying equipment expire.
“There have been obvious advantages to the consumer for purchasing due to the enhanced Section 179 tax deduction and Bonus Depreciation. But as these added incentives go away, where buyers are unable to take larger deductions on equipment when they purchase, leasing may become a more beneficial tax strategy when it comes to additional equipment needs,” Mills explains.
Bonus Depreciation and enhanced Section 179 deductions are scheduled to expire at the end of 2013. Mills says these incentives have been extended in the past but, given the current political climate in Washington, D.C., there’s no guarantee of an additional extension and it currently appears unlikely.
“If these incentives do expire, equipment purchases may be subject to the regular Section 179 and regular depreciation, which would significantly delay tax deductions and increase equipment costs,” Mills says. Without Bonus Depreciation and enhanced Section 179 deductions, the tax benefits of purchasing equipment are greatly diminished.
“We strongly recommend that customers talk to their tax advisor to determine the best option for their operation,” he says.
Although the tax laws going into 2014 are uncertain, there are other reasons to consider leasing large equipment. “A growing business is one example where an agricultural operation could benefit from leasing,” says Sue Pegg, product marketing manager with John Deere Financial.
“As an operation grows, it has the need for bigger and bigger equipment. The bigger equipment comes with a bigger price tag, so leasing is a great way to get into some of those machines without having such a big impact on the customer’s cash flow,” she explains.
The up-front payment on a lease is typically lower than the down payment on an installment loan, she says.
Leasing equipment also likely includes warranties, Pegg points out. “You’re less apt to have to pay as much out of pocket when breakdowns do occur. It’s all about maintaining the up time, making sure the equipment is able to run 24/7.”
A short term lease (two or three years) also keeps the operator in the freshest technology, according to Pegg. “You can have access to all of the online systems monitoring and be able to optimize how your machine is running.”
For smaller operations, leasing used equipment is a way of getting into more modern technology without the price tag of new.
Another consideration for leasing comes with laws requiring reduced emissions from large equipment, according to Pegg. If you’re in a state requiring lower emissions, leasing is a good way to get into new equipment that meets those stricter requirements.
“It’s a much more cash flow friendly way to get a lot of new equipment if you’re required to do so,” Pegg says.
Of course, there are instances when leasing is not the right option, and one of those is for an operator who intends to keep the equipment until retirement.
“It depends on the length of ownership,” says Mike Moeller, product marketing manager with John Deere Financial. “If you’re going to keep that equipment seven to nine years, purchasing might make the most sense.”
“The hour limits on leases is also a consideration,” he says. “If the hour usage in a feedlot will be very high, it may be more beneficial to purchase. On a lease with high hour limits, the lease payments may be very similar to installment loan payments.”
“It comes down to an operator’s needs, usage, cash flow and tax strategy,” Moeller says. There’s not a one-size-fits-all strategy when it comes to acquiring large equipment. “Take a look at the situation and determine what works best for an individual operation,” he suggests.