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Making Sense of Leasing

We recently interviewed Jeff Moser, executive loan officer with AgChoice Farm Credit. No matter if you are a full- or part-time farmer, agricultural producers have a number of capital needs to make their operations successful. While often overlooked, leases can be a valuable option by providing tax advantages, little or no down payments and lower monthly payments. Jeff discussed leases, how they compare with loans and when leases might make sense for a farmer. Listen to the full podcast episode with Jeff here.

 

First start by breaking it down in simple terms - what is a lease, when can leases be used, and how do they work?

First of all, a leasing company allows the use of an item that they own, meaning the leasing company, while you pay a periodic lease or rental payment. In essence, you only pay for the use of the equipment or other items rather than paying a principal and interest payment on the loan. Leases are offered on a variety of items. Oftentimes you might think of a lease on a tractor, combine or other piece of equipment. But leases are also available on buildings, greenhouses, solar systems, wine bins, grain storage, wine barrels, vehicles, robotic type equipment, and much more.

AgChoice Farm Credit provides leases through Farm Credit Leasing and offers leases on all the items I've mentioned, both new and used. However, there are a few limitations on used as far as age. Our partnership with Farm Credit Leasing provides professional guidance in structuring your lease, a necessity for receiving the full tax benefit of a lease. We offer those structures and pricing comparisons along with volume purchasing discounts, farm equipment protection and selection assistance on transportation and material handling type equipment.

Farm Credit Leasing also has a fleet partner program, which offers leases on over the road, trucks, pickups, and other passenger type vehicles. AgChoice has numerous customers that have leased their entire fleet of vehicles through Farm Credit Leasing. The benefit of leasing vehicles not only helps you from a tax standpoint, but also in the acquisition of a vehicle, as Farm Credit Leasing has the buying power to purchase these vehicles direct from the factory as opposed to going through a dealer.

When might a lease make more sense instead of a loan?

There's a big difference between a loan and lease. Number one is if you borrow the money to purchase an asset, you actually own that asset. You depreciate that asset and it is on your depreciation schedule as long as you own it. On a lease, the leasing company actually owns the asset, you pay for the use of it as I explained earlier. And you get the write off of that particular lease payment on your taxes as an expense and the leasing company takes the depreciation.

A couple of the big things to consider if you're comparing a lease to a loan are on a lease you have some very flexible terms and conditions. Leasing can be provided on 100% of the cost of obtaining that asset, which allows you to preserve working capital and your operating lines of credit.

You can customize the payment structure on leases to work into your cash flow timeline. For instance, you can lease something on monthly payments, quarterly payments, semi-annual or annual. These flexible terms also help you from a cash flow standpoint.

Tax benefits are another great reason to consider a lease due to the possibility that the lease payment will be fully tax deductible as part of your business expense on the asset you are obtaining, as long as the structure is structured as a true lease. The tax benefit is a significant opportunity for most leases. The largest tax benefit involves the shortest term lease on the longest term tax depreciation of that asset. For instance, a multipurpose building that has a 20, 30, or even 39 ½ year tax depreciation. You could lease for anywhere from five to seven years and get a significant tax benefit by writing off that asset in a very quick timeframe compared to the tax depreciation timeframe. This is where you will benefit the most from a lease, especially on buildings and grain storage that would have 10 years or longer tax depreciable life.

Some of our listeners might be interested in a purchase leaseback. Could you explain what that is and how it works?

A purchase lease back is something when a customer would actually purchase a piece of equipment or actually construct a building or other structure during a calendar year. Then at some point in time during that year, generally we see it in the third or fourth quarter of the year, they determine that they either, number one, are running into a tax liability they did not realize, or number two, have pinched their cash flow for one reason or other. In those cases, they actually sell that asset to Farm Credit Leasing. The leasing company structures a lease that will give them the benefit of putting cash back into their pocket and creating a lease payment that will fit their particular needs. As I said earlier, the fourth quarter of the year is typically when something like this makes the biggest sense.

Are there any final thoughts you’d like to share with our listeners about leases?

First off I think this time of the year, which we're in October right now, the best thing to do is get together with your accountant, get some fall tax planning and see if number one, you need to purchase something this year that would help you from a tax standpoint, because leasing isn't always the answer. But if you meet with your tax advisor and they suggest that you need some additional write-offs, leasing is a great way to do it, especially if it's something you've purchased earlier in the year, when to do a purchase lease back that you had paid cash for.

You can get a complete year’s pay off or pay down rather in one annual payment here at the end of the year, you can get that write off that will help you from a tax standpoint. By doing a purchase lease back at the end of the year, you can replenish your working capital, improve your cashflow, especially this year as what we see coming on for crop supplies in 2022 with the significant increase in those costs, cash flow may be the key going into next year, especially if you want to do some pre-buying this year of those crop supplies for 2022.

I have one customer that has built a building each year for the last three years from cash flow, turned around in December of each year and has done a purchase lease back, paid the first annual payment and done either three years or four year leases and got some significant tax benefit.


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