Leases and loans are simply two different methods of financing. One finances the use of a tractor; while the other finances the purchase. It’s not possible to say that one method is always better than the other because it depends on your own individual situation and preferences.
Why should you consider leasing agricultural equipment versus purchasing equipment outright?
One reason to lease as opposed to purchase could be the lack of cash available to purchase expensive equipment. Leasing will give you an option to save your cash and set up affordable payments for a term that you choose. With a lease, you may be able to deduct your entire lease payment as an “operating expense.” It is essential that you understand the tax implications associated with each type of lease. There are many types of leases but the most commonly used for equipment are operating and capital leases. It is always recommended that you speak with your tax accountant about the type kind of lease that best fits your tax situation. Shorter term leases may be preferable due to the prospect of future advances in technology and potential equipment obsolescence. Why tie up all your cash or a large portion on equipment that may need to be updated or replaced in a few years?
Ask a few questions before you sign your lease contract to make sure you know what you are getting into. For example, what are the hour limitations for that piece of equipment and is it likely to be exceeded? What are the maintenance requirements?
Remember that leasing is a financing contract with interest charged. It is important to know what your effective interest rate will be; many times, the interest rate is not clearly written in the contract.
Leasing may be considered a better option for certain pieces of equipment. You would not want to lease every piece of farm equipment. Consider leasing equipment that is used frequently and has high maintenance cost, like a sprayer, since it is used throughout the whole growing season.
Historically, most ag equipment is purchased rather than leased. If you keep your farm equipment for several years and don’t trade every time a new feature is available, purchasing may be a better option for you.
It is important to do your homework when deciding between a lease or a purchase. As a minimum, you will want to consider these factors – your cash flow situation, what piece of equipment, dollar requirements, contract terms, how long you keep your equipment and any tax implications.