Farming Equipment – Lease or Purchase
Business decisions hedge on taxes and interest rates
Smart business people are constantly looking for ways to cut costs and make a profit without sacrificing quality for their customers.
But it takes large pieces of equipment to manufacture things, and businessmen have to look at short-term gains, long-term growth, tax breaks and consequences, depreciation and a whole list of laws to keep their chosen vocation moving along in the right direction.
Farmers are just one of those businesses that have to dive into the discussion of “should I buy or should I lease?”
There’s no straight answer to the question as the variables constantly change, so it gets asked annually.
Farmer Nott Wheeler and Certified Public Accountant Danny Barfield of Barfield Salley & Associates, waded into the debate as it relates to farmers.
As a CPA since 1971, and working in the agriculture field, Barfield has helped his clients make heads or tails of this debate by deciphering tax codes, multiplying interest rates and taking into consideration what the equipment is being used for.
“I almost never recommend to my farmer clients that they lease equipment, per se, because no matter how you frame it out, they are getting the equipment and someone is charging them for the use of the capital,” Barfield said. “I don’t care how it’s done whether it’s financed through John Deere or Case credit. When that machine leaves that business whether it’s bought or leased – there’s an interest charge on it.”
Sometimes those recommendations are over-ridden, however, due to other outstanding factors in the equation.
Today’s farm machinery — such as tractors and combines — have high-level, cutting-edge technology built into them. GPS and other computerized equipment are designed to help the farmer get more done with less help, but the path of technology is always changing.
Wheeler has been going by the idea of buying equipment that is not computerized, but leasing the ones that are.
“For years and years our philosophy was to buy equipment and spread that cost out over years and years,” Wheeler explained.
“The complexity of these machines has gotten so much higher with computers and engine controls — a lot of that is electronic. I’m doubtful on the long-term dependability of them. I’m afraid of the harsh environment that we use them in won’t last 25 years. So we’ve shifted more toward leasing tractors and combines,” he said.
It’s not uncommon to find tractors that are several decades old still running on area farms. When these break down, they can normally at least “limp home” to the shop to be repaired, or at least cobbled back to a point where they are still of use.
A lot of today’s technology will shut a tractor or combine down immediately when there is a problem. That could be in the middle of a turnrow, or a highway, and it could be something very simple that caused the high-tech breakdown.
“We park them in a shed over the winter and the rats can get in them and eat the wires. You can lose one little wire on these tractors today and it’s almost impossible to find out what the problem is,” Wheeler said. “Time will tell how well this newer equipment holds up, but for now I’m gambling on it not. You don’t want to own one of these newer pieces of equipment 10 years down the road and have a lot of repair costs.”
For Wheeler, there is the constant battle of owning something after paying for it for a fixed amount of time as opposed to not.
“When you buy it, you can depreciate it. That’s a tax management tool. But when you lease, you can write off the entire amount of the lease, but you don’t have a piece of equipment at the end of the lease,” Wheeler said.
Another factor that is always there is interest rates. When they are low, as they are now, leasing is more affordable.
“A lot of times you can lease a piece of equipment for less out-of-pocket costs per year than buying it outright,” Wheeler said. “Right now prices are up and farm income is up and the price of used equipment is more valuable, so a lease can be more economical because the residual cost is higher.”
Depending on the size of the farm and type of crops, there may have to be a push to one side or the other of leasing or buying.
“If you’re getting into a new crop and you’re not sure how it will work out, then you want to keep yourself flexible by operating leases,” Barfield said.
Barfield has seen a trend with his larger clients “trading machinery every year.”
“There’s a market out there for combines and tractors that are a year old and don’t have many hours on them,” Barfield said. “The manufacturers have big incentives that they pay for those larger purchases and pass them on to the farmer so the farmer always has a new machine that’s under warranty.”
This comes in handy when a farmer has several thousand acres to harvest before an impending hurricane may arrive, but it takes planning from the farmer.
Not many dealers have a couple dozen combines on their equipment lot at one time.
“They don’t manufacture combines every week. You’re several months out on all that,” Barfield said. “It’s not uncommon to have a 10,000 acre farm in the Delta, but in other parts of the country there’s an active market where farms are much smaller and only need one combine.”
So the debate continues for farmers as to whether buy or lease. Whatever makes the most sense for the least amount of cost out of pocket that gets the crops in will be the winner each year.