This article examines the benefits of leasing farm machinery and equipment. Whether you are in the market to acquire power machinery, farm implements, haying equipment, storage bins or other pieces of equipment, you should consider how the leasing of those items may tie in to your overall farming operation.
Leasing is beneficial because it often requires no down payment and offers 100 percent financing. It allows you to conserve working capital to invest in the expansion of your business, obtain the latest and most reliable equipment or alternatively to hold your capital while pondering the ebb and flow of our current commodity market. If you are close to retirement, leasing is a great way to stay productive for your remaining business years without making large financial investments. Finally, leasing can provide flexible terms to meet your particular needs, and it has certain undeniable tax advantages.
There are many types of machinery and equipment leases. Some leases allow you to fully deduct the lease payments from your taxes, but not to depreciate the asset. Other leases allow you to deduct your lease payment and depreciate the asset, but you have to put up some other asset that you own as collateral. There are also operating leases, lease credit lines, special leases that require certain interim or “progress” payments to the vendor and leases designed primarily for vehicles and heavy equipment.
Leasing is usually available through credit companies associated with the manufacturer of the machinery or equipment sold at your local implement dealerships. It also may be obtained through certain national financing institutions and local banks. Regardless of the source, leasing typically originates with a visit to the local dealership. It is important to understand that when a farmer chooses to lease a particular piece of equipment at the dealership, a sale of that asset actually occurs. Indeed, the dealership sells the piece to the financing company (lessor), which in turn leases the equipment to the farmer (lessee). The dealership simply acts as an intermediary. Because two deals may be happening at once, you might be able to negotiate terms at both ends. For instance, you might be able to negotiate the “sales price” of the equipment in the dealership-to-lender transaction and the “lease price” in the lender-to-farmer transaction.
Do not hesitate to ask the representative about the different lease programs the dealership offers and whether certain individual terms (such as periodic payments, lease duration or hours spent in the field) are negotiable. Also, review copies of any proposed lease contracts with your tax adviser and attorney. When reviewing a lease, be aware that all contracts must have at least certain essential terms, such as identification of the proper parties, a description of the equipment being leased, the beginning and ending dates of the lease and the payment structure of the lease (i.e., monthly, quarterly, semi-annually, annually, etc.). In addition, there likely will be other important terms, such as the right to renew the lease for an additional term(s), an option to purchase the equipment at the end of the lease term, and clauses for wear and tear, maintenance and use, warranties, taxes and insurance. Lastly, pay close attention to the default provisions in the lease, particularly the “notice” requirements for the lender and your prospective “right to cure” in case of a default.
To determine which method of control over a piece of equipment (i.e., leasing or owning) may best benefit your particular farming operation, reflect on your need for that piece of equipment and the objectives you want to achieve when acquiring it.
Jerry Potocnik is an attorney in Blue Springs, Mo. He is licensed to practice law in Missouri and Kansas.
