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Leasing Remains Effective Tool Under New Tax Laws

Financial strategy to reduce costs, gain tax advantages and preserve working capital

Published on 03/22/2018

Tight profit margins and progressive tax benefits are two drivers that have played a role in producers’ equipment leasing decisions in recent years.   

“Over the past decade more and more producers have embraced leasing as a smart financial tool to keep costs down, preserve cash and credit lines while paying only a portion of the equipment’s total asset value,” says Amy Weum, Farm Credit Leasing relationship manager.

“In the past, a perceived pride of ownership often swayed producers toward paying cash or financing, but given where the ag economy has been in the last few years, it’s really come down to tax deductibility and what’s going to allow producers to make the lowest payment.”

True tax and conditional leases are popular

From a tax perspective, Weum says the two most popular types of leases are a true tax lease and a conditional sales lease.

A true tax lease enables producers to deduct their full lease rental payment as an operating expense rather than depreciating the asset. “Given the current tax reform, a true-tax lease is particularly attractive as it allows producers to effectively plan for the future with steady, annual write-offs over the course of the lease rather than expensing 100% in the first year only,” says Weum.

A conditional sales lease, according to Weum, is a lease that enables producers to take depreciation just like a loan while benefitting from a typically much lower lease payment compared to a loan payment. As the tax owner, it also allows producers to take advantage of 100% bonus depreciation and increased Section 179 deductions.

In addition to tax benefits and financial advantages, leasing can help producers keep their machinery under warranty and avoid equipment obsolescence or breakdowns during critical times, such as harvest. It’s also a strategy producers can use to replace their equipment more frequently and improve profitable growth with new technologies.

Multiple leases available

“With a lease you’re basically rolling the equity each time to the new lease, so you can keep your payments low while having the latest and greatest in technology,” says Weum.

Although larger operations tend to demand a more frequent trade cycle, there’s a leasing program to fit every producer’s needs regardless of the size of operation.

“In order to make an informed decision, producers should visit with their tax advisor before entering in to a lease,” Weum advises. “They should understand the terms and know in advance how they will be treating the lease for tax purposes.”

AgDirect Lease Options:

FPO – Fixed Purchase Option
      • Considered a true-tax lease
      • Customer writes off lease payment, doesn’t depreciate asset
      • Also known as a “Walk Away Lease”
      • Customer has the option to purchase, trade or surrender (walk away) asset

PRO – Purchase or Renew Only
      • Considered a true-tax lease
      • Customer writes off lease payment, doesn’t depreciate asset
      • Customer has option to purchase, trade, or renew lease (no walk away option)
      • Residuals are 5-10% higher than FPO lease

PUT – Purchase Upon Termination
      • Considered a conditional sales lease
      • Customer is obligated to purchase or trade asset (no walk away or renewal option)
      • Customer takes depreciation on asset, doesn’t write off lease payment
      • Residuals are 5-10% higher than FPO lease

To learn more about equipment leases and how they might work for your operation, contact your nearest AgDirect territory manager or the AgDirect Finance team at 888-525-9805. 

Learning Center

Agriculture is constantly evolving, which is why AgDirect works to help you make the right decision for your operation when it comes to financing ag equipment.

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