Leasing is one of the most important financial tools available to farmers and ranchers. There are many advantages to leasing as opposed to an outright purchase, including working capitol preservation, accelerated tax write-offs, and estate planning. Leasing is an ideal solution to help grow a farming operation in the near-term while providing an avenue to transition to a future generation.
Let’s explore the benefits and considerations of leasing.
Tax Advantages
Leasing offers farmers and ranchers tax benefits that should be considered. Lease payments are tax deductible as business expenses on a properly structured true lease. Additional tax deductions can be captured by expensing level lease payments over the term of the lease, which reduces taxable income. You can also expense equipment or facilities quicker than by depreciating them.
Leasing a 20-year property, like a machine shed, allows the farmer to write off 70% to 80% of the facility in five to seven years instead of 20. Writing off payments over the course of the lease provides for level deductions that may enable the farmer annual write-offs, rather than taking depreciation in a lump sum with limited write off in future years.
Working Capital Preservation
Working capital is critical to farming operations. It is possible to maintain financial flexibility and stability by preserving working capital while saving money for future expenses. Leasing provides 100% financing with no down payment required. The only upfront cash required is often the first lease payment. This is usually significantly less than the down payment on a loan. Retaining more money preserves cash as the event your business seeks to grow into the future.
Estate Planning
Leasing serves as an estate planning option. Transitioning your operation to the next generation is a big step with major considerations. A lease allows farmers to seamlessly transfer leased assets to the next generation, keeping the assets out of the estate, and offering tax benefits. When residual comes due at the end of a lease, the next generation can purchase the assets for the residual amount, and ownership of the assets transfers directly from the leasing company to the next generation.
Collateral
One unique consideration involving leasing facilities is the collateral model it follows. Farmers utilizing a lease do not typically need a real estate mortgage, and therefore do not need to put up collateral. This would be associated with the size of the project.
Types of Projects
There are several types of projects that can be leased. They include:
- Machine sheds
- Farm shops
- Grain storage
- Fleet
- Titled equipment
- Potato, vegetable, and fruit storage (buildings and crates)
- Equipment processing lines
- Dairy robots and parlors
- Poultry/egg laying facilities
- Airplane hangars
- Truck wash
- Seed and feed dealerships
Leasing provides flexibility for today’s needs and tomorrow’s goals. Contact your local AgCountry office to speak with a loan officer to learn about leasing options for your farm or ranch.
This information is intended for informational purposes only, and are not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
