September 10, 2020 |Leasing
Before you buy or borrow equipment, consider the benefits of leasing.
You need new farm equipment, but you don’t want to lay out a lot of cash. Other than buying used or sharing equipment, what are your options? Think about leasing.
For many in agriculture, leasing is a sound alternative to purchasing new or used assets — from machinery to grain bins to office facilities. You can even lease solar panels, processing equipment and greenhouses.
But what’s right for one agricultural operation doesn’t always work for the next. It all depends on your situation — income taxes, how long you intend to keep the equipment and cash flow, for instance.
Texas Farm Credit works with Farm Credit Leasing to offer leasing to borrowers. We recognize that leasing can be a better option than financing for some customers in certain circumstances. Our goal is to support our customer’s best interests, whether it’s with a loan or a lease.
To help you decide if leasing is right for you, consult your tax adviser and Farm Credit lender. Following are some key factors to consider.
- Save with no down payment – With a lease, you’re usually required to make the first payment upfront, but there is no down payment, or the down payment is low. Up to 100% financing is often available.
- Preserve working capital and maintain cash flow – With no down payment, you can acquire the equipment you need while retaining your working capital for other expenditures. And because lease payments are typically lower than loan payments, you’re able to maintain cash flow.
- Reduce taxable income – Lease payments are typically 100% deductible from your operating expenses. In comparison, the interest payment on a loan is usually tax-deductible, but the entire loan payment is not.
- Manage and upgrade fleet – Leasing allows you to routinely change or upgrade your equipment and vehicles at the end of the lease term. This can help you stay current with the latest technology while minimizing equipment downtime.
- Choose from flexible terms – Most leasing companies offer flexible lease structures, payment schedules, end-of-lease options and maturity dates that let you tailor the lease to your needs.
- Exercise option to purchase – At the end of the lease, you can usually purchase the asset outright, renew the lease or simply return the asset.
- Transition ownership easily – Leasing can help you transition ownership to the next generation at the end of the lease, potentially helping with estate tax issues.
- Forfeit certain tax benefits – When you lease, you forfeit tax credits, cash incentives and depreciation to the leasing company. Often, however, the leasing company will pass along some of these benefits in the form of discounts. And sometimes leases can be structured to allow for depreciation.
- Sacrifice ownership benefits – You can’t retrofit or make alterations if you don’t own the equipment. Also, if you like to retain equipment long after it’s paid for itself, leasing might not be for you.
- Lose out on patronage – Equipment loans usually qualify for patronage from your lending co-op, but leases are not eligible for patronage.
Whether you need a pickup truck, cattle trailer, cotton picker or state-of-the-art processing equipment, consider the pros and cons of leasing. Contact your local Texas Farm Credit branch office for more information about leasing equipment for your farm, ranch or agribusiness.
Frequently Asked Questions
An agricultural lease is a formal rental agreement between a landowner and a farmer, wherein the farmer agrees to pay a fixed amount for a specific parcel of property for a set period of time. Agricultural leases often contain provisions restricting the type of farming operations or crops that may be planted. Many such leases also allow landlords to place a lien on crops or equipment if the farmer is unable to make rent payments.
Leasing your farmland can be extremely profitable in the long run. How much you could profit depends on the rate you would charge and how much land you have available to lease. As long as the rental amount is sufficient to cover property taxes and insurance, leasing your farmland could be quite lucrative. According to the USDA, roughly 39% of America’s farmland is leased and 38% of landlords are retired farmers.