Reduction of Section 179 in 2013 could boost leasing option
Leasing has a small, though respectable, share of the farm equipment finance pool even with several political and economic factors against it: six-digit equipment write-offs in the Internal Revenue Service code in year one and strong incomes giving farmers plenty of cash.
Change either of those variables and leasing suddenly looks far more attractive, experts say. Even so, there are conditions under which leasing makes smart business sense today, and some suggest an uptick in leasing is already occurring for several important reasons.
"Leasing improves cash flow and requires less money up front," says Kevin Smallwood, director of marketing and program management for AGCO Finance. As a result, it frees up capital for other farm investments.
"While annual payments are generally lower for leasing, for farmers in higher tax brackets, the expensing tax credit options often offset that. Thus leasing right now makes the most sense for producers who have a low marginal tax rate or need to preserve cash flow."
Leasing offers farmers other benefits too. Smallwood says sometimes a producer is a long-term user of a specific brand of equipment but would like to try something different with new features. Leasing is a low-risk way to do that. For producers who trade equipment every couple of years, leasing can offer advantages in the form of lower-cost payments compared to owning, he says.
What share of farm equipment market is leased? "Less than 10% of AGCO equipment is leased,
and that’s the industry norm," Smallwood says. The most popular items are high-horsepower tractors and application equipment. Financial Benefits. Leasing isn’t just about flexibility, Smallwood says. It makes managing risk easier by making per-acre cost calibration simpler to determine.
"Leasing typically reduces cost per hour, per acre on per bushel," says Tim Biewer, marketing director for CNH Capital. Leasing has increased recently as more producers see the advantages of using versus owning. Leasing typically offers the potential to have the latest in technology and perhaps higher horsepower or more features sooner compared with a purchase, Biewer explains. Leasing also fits in well for producers who are renting more land but would like to avoid getting locked into long-term equipment payments, he adds.
If all this is true, why don’t more farmers lease their equipment? "Pride of ownership, pure and
simple," says William Edwards, an Iowa State University agricultural economist. "That, along with tax code advantages to purchases and the fact that leasing does not make economic sense for producers who plan to own equipment for a long time."
If Congress doesn’t extend this year’s $139,000 Section 179 expensing option and the 50% bonus firstyear depreciation deduction, Biewer sees the potential for an increase in leasing beginning in 2013. Such tax breaks are popular, so it’s possible that Congress will extend them in the lame duck session.
While annual payments are generally lower for leasing, for farmers in higher tax brackets the expensing tax credit options often offset that. Thus leasing right now makes the most sense for producers with a low marginal tax rate or that need to preserve cash flow, says Troy Dumler, an agricultural economist at Kansas State University. For example, in a study he conducted with other economists, he found that on a piece of equipment with annual payments of $60,000, leasing cut them by $20,000, but tax deductions often made up the difference. "That said, there are few rules of thumb," he says. "You have to run the numbers."
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- Mid-November 2012