Lease or Buy? Cash Flow, Rather Than Tax Breaks, May Define Your Answer

December 3, 2008 06:00 PM
Cash flow and balance sheet structure will likely be a reason for farmers to choose leasing rather than an outright equipment purchase, says Brad Palen, a Certified Public Accountant. With a temporary bonus depreciation rule in effect for 2008, the numbers tend to weight heavily in favor of purchasing equipment. However, tax plans are not always the overriding business decision.

"What makes sense from a tax perspective doesn't always make sense from an economic perspective,” says Palen, who is a manager in the ag division at Kennedy and Coe, a Midwestern accounting firm.

Most leases are structured properly, with no "bargain-purchase option” at the end of the lease term, but it's still a good idea to run it by your accountant, says Palen. "A salesperson will try to inform you on what they think you need to know about the law, but they most likely don't know your specific situation. And the IRS does scrutinize poorly structured lease agreements.” From a tax perspective, if you intend to own the new equipment at the end of the lease term, you're going to be better off if you purchase it and take advantage of the bonus depreciation rules, says Palen, but with some auto manufacturers' incentives—either leasing or buying—it is a good idea to run the numbers.

"Cash flow and debt structure is probably going to be a bigger driver towards leasing this year than taxes. Do the payment obligations match up better with my debt structure, given what I'm doing with my other obligations? Those are important questions that can only be answered by the business owner,” says Palen.


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