If your farm requires the use of trucks, tractors, planters, or other specialized machinery used in farming, you may wonder how you'll ever manage to get your hands on these essential items. Unless you have huge amounts of startup capital that can be budgeted toward such purchases, you'll probably need to lease your heavy equipment instead. This is a common practice that has helped many enterprises grow and thrive while controlling expenses. Here are some of the basic concepts you'll need to know before you leap into leasing.
Types of Heavy Equipment Leases
You'll find that you have several heavy equipment leasing methods to choose from. Your final decision will be influenced by the type of equipment you're leasing and your long-term plans for using it. The principal categories of heavy equipment lease include:
- Fair market value lease - This is the most flexible and common type of lease agreement, in which you can either keep using the equipment, return it, or upgrade it to a different item at the end of the lease term. This agreement makes the most sense if you'll be subjecting the equipment to heavy use, such as a truck used to haul fertilizer short distances on a daily basis.
- Wrap lease - This is a form of consolidation loan. If you'll be needing additional equipment down the road, you can add it onto your current equipment lease and make a single larger payment for all the covered items instead of keeping up with multiple monthly payments. Wrap leases make a lot of sense if you're starting with small farm but want to build it into a large one in future years.
- Dollar buyout - This kind of "rent to own" lease is about as straightforward as they come -- you make all your payments on time, and then when the lease is over you buy the equipment for a dollar. This option is a good one when you want to have your own fleet of threshers, tractors, or diesel trucks, but simply can't afford to purchase all those items up front.
- Sale-leaseback transaction - A sale-leaseback is exactly what it sounds like. If your capital is tied up in heavy equipment that you own, you can sell the equipment to a buyer and then lease it back under whatever terms you choose at the time of the agreement. This is a sensible option when you need funding but can't get an affordable loan from the bank.
Leasing vs. Renting
Of course you could also rent that farm equipment instead of buying, so why shouldn't you? If you only need a piece of specialized equipment once in a great while (such as a combine harvester when it's time to bring in the crops), or if you want to make sure the owner of the equipment is stuck with all the maintenance expenses, then renting is indeed a smart way to go. The great advantage of leasing is the fact that you have the option of eventually becoming the sole owner of the equipment, which allows you to build your tangible assets. If you come into full ownership through leasing, you'll also be free to sell that harvester to someone else and purchase a new one for future harvest seasons.
In some situations leasing heavy equipment can provide you with some handy tax breaks. While it's true that a purchase enables you to use interest and depreciation figures to lower your taxable income, the IRS also allows you to deduct "rent for land vehicles and animals used in farming." You also get to pay the sales tax on leased equipment incrementally with each payment, instead of having to shell out for the entire amount up front as you would for a purchase.
Ultimately, the question of "to lease or not to lease" depends on your current financial situation, the length of time you'll need the equipment, the amount of flexibility you prefer for your future options, and the wisest tax strategy for your agriculture enterprise. Talk to an experienced leasing officer about all these considerations before buying, leasing or renting heavy equipment for farming.