Is It Better to Lease or Buy Farm Equipment?
Machinery and equipment are a major expense for agricultural companies. In fact, it’s usually the second biggest expense for most farms. Only land is more costly.
On a per acre basis, many farms pay hundreds of dollars in equipment. One study showed that the average equipment investment for farms and agricultural businesses ranged from $94 to $131 per acre.
And that expense is only growing. Fuel and equipment costs have been going up for several years. For example, in 2009, fuel and equipment costs jumped by 25 percent. Just a few years before that, they went up by 11 percent.
Having the right farm machinery, however, can make a big difference. It can reduce time, labor and wasted materials. That’s why it’s worth considering the different options you have for acquiring the right agriculture equipment.
In general, farms use one of four strategies:
- Buying equipment outright
- Leasing equipment
- Renting equipment for short periods of time
- Custom hiring equipment for specific jobs
In practice, many farms use a combination of methods to make sure they have the right equipment. As well as long-term leases and outright purchases, farms can rent or custom hire equipment for short jobs.
One of the big differences between leasing and renting is the length of the contract. Equipment leases usually last from three to five years. By contrast, farm equipment rentals usually last for just a few days or weeks.
For long-term use, most farms choose to buy or lease equipment. They’re both cost effective options that give a farm long-term access to the right tools.
How do you know when it’s better to lease agricultural equipment and when to buy it, though? Factors like improved productivity, cost effectiveness and the usefulness of the equipment all play a role.
Buying Farm Equipment
Buying agricultural equipment is one of the most popular options for farms. That’s because it brings a lot of benefits. Once agricultural equipment is purchased, the farm holds the title to it.
That means there are no limits on how and when you use your equipment. Some leases contain clauses restricting the number of hours equipment can run or the types of jobs the equipment can be used on.
Many farm managers also like the financial benefits that come with owning equipment. Equipment you own is considered an asset. You can usually deduct purchase expenses on your taxes when you buy equipment, and you won’t be stuck in a lease contract.
Pros of Buying Agricultural Equipment
Cons of Buying Agricultural Equipment
When Buying Farm Equipment Is a Good Choice
Deciding whether to lease or buy farm equipment depends on a number of factors. Business stability, fuel costs, technology advances and tax implications play a role. We’ve put together this list of situations when purchasing is a good choice:
- You Need Reliable Equipment With a Long Life
Consider buying equipment that has a long useful life and that you will use regularly. Because the overall cost of buying equipment is lower than that of leasing it, you’ll get the most benefit from owning this equipment.
On the other hand, if you use the equipment irregularly or it has a short useful life, consider leasing it instead. For very short-term projects, you may want to custom hire or even rent equipment. This can reduce the impact of learning to use new controls or software.
Versatile equipment like tractors and earthmovers are good choices for purchasing. Consider also equipment that has interchangeable attachments. You’ll be able to use this equipment for a number of different jobs, reducing the need to rent other equipment to get the project done.
- You Want to Take Advantage of Tax Incentives
Because farm equipment you own is an asset, you may be able to deduct some, or all, of the cost of purchase. Section 179 of the IRS code allows businesses to deduct up to the full cost of the equipment as a business expense in the year you purchase it.
If you don’t use this method of deducting your expenses, you still have options. You can deduct the depreciation of your equipment each year from your business assets. If you are looking for ways to lower your tax payments, purchasing equipment may offer you more benefits than leasing it.
Leasing Farm Equipment
The other common option is to lease farming equipment. Under a lease arrangement, a farm signs a contract to use the equipment for a set period of time. Leases usually require a deposit and a monthly lease payment.
Leased equipment is still owned by the company that leases it out. This means it doesn’t appear as an asset — or debt — on the farm’s books. However, many lease agreements include a purchase clause that allows the farm to buy the equipment once the lease expires.
When looking at lease vs. buy tax benefits, you won’t enjoy the same as when you buy ag equipment because with a lease, you don’t own the equipment. Purchased equipment can be deducted, but leased equipment can’t be. However, in many cases you can treat lease payments as a business expense.
Leases can be structured in a number of ways. A “net lease” is a common structure. With this type of lease, the lessee makes a monthly payment for equipment. The lessee makes payments for insurance, taxes or other costs separately.
Other leases have these expenses bundled into the monthly payment. This type of lease can be appealing to farms because you’re able to estimate your monthly expenses more accurately. In some cases, warranties and repair plans are bundled into an equipment lease as well.
Pros of Leasing Farm Equipment
Cons of Leasing Farm Equipment
When to Consider Leasing Agricultural Equipment
Many farms lease some parts of their fleet, while purchasing other agriculture equipment outright. Leasing some equipment allows farms to scale their production up temporarily, test out new technology before purchasing and free up more cash for other operations.
Consider leasing equipment in the following scenarios:
If you don’t need long-term access to equipment, leasing it can be a more cost-effective approach. If your project is likely to take less than five years, consider leasing equipment instead of purchasing it.
If it’s important to keep expenses low in the short term, you may want to consider leasing equipment. That’s because the security deposit is usually significantly lower than the down payment for purchasing farm equipment. Because most leases last just a few years, your lease payments are likely to be lower than loan payments from a purchase.
If you need to maintain a flexible cash flow because of business expansion or a new market, leasing can help you do this. However, be aware that long-term leasing can lead to higher costs than buying equipment outright.
New technology is a good reason to lease. If you want to get started with wireless farm data, smart planters or aerial imaging, consider leasing equipment instead of purchasing it. That’s because technology is changing quickly in these areas. Today’s state-of-the-art equipment could be obsolete in just a few years.
Because of short lease terms, you can trade up more easily than if you owned the equipment.
Some businesses also want to make sure this type of technology really does increase their production before committing to a purchase. A short-term lease allows plenty of time to get used to the equipment and see the impact it makes for your business before you commit.
How to Calculate Whether Renting or Buying Agricultural Equipment Is More Cost Effective
For many farms, cost effectiveness is paramount. That’s why many so many farms conduct a cost-benefit analysis before they decide whether to rent or buy farm equipment.
The true cost of the same equipment can vary by farm as well. Along with the purchase price, you’ll need to take into account the cost of repairs, fuel and labor. If you’re still not sure whether leasing or buying is more cost effective, consider using the DIRTI formula.
Looking at the true costs of renting and owning equipment can give you a better sense of what the right choice is for you. DIRTI is an acronym that stands for:
- Interest on capital
In other words, it includes all of the major expenses associated with ag equipment. This can help you to see what the costs of ownership or leasing look like over time.
Read on to find out more about how leasing vs. buying ag equipment can affect each type of equipment expense:
If you’ve purchased equipment and consider it an asset, you’ll need to consider depreciation. This refers to the value that equipment loses as it ages. You may already use a certain method to calculate depreciation. If not, you can get an idea of how much your equipment will depreciate each year with the following formula:
- Cost of equipment / Expected life of equipment = straight line depreciation
If you’re leasing equipment instead of buying it, you won’t need to worry about depreciation.
Interest on Capital
This is the average interest you pay for one year. If you’re purchasing equipment with financing, you’ll pay interest on the amount you finance.
Whether you lease or buy farm equipment, you’re likely to be responsible for some amount of repairs and maintenance. However, you may be responsible for different costs if you buy than if you lease.
If you’ll have a warranty, you may want to include the cost of the warranty in this amount.
If you purchase farm equipment, you’ll need to pay business taxes on it. The amount of tax you’ll pay usually depends on the value of the equipment and the county and state the equipment is in.
If you lease equipment, you might still pay taxes. Whether you’ll pay taxes on farm equipment usually depends on the type of lease and how long it lasts. Lessees are often responsible for taxes on a long-term lease.
If you lease equipment with a net lease, you might be responsible for paying taxes directly. In other situations, taxes are paid indirectly through the lease itself. If you’re considering leasing, confirm who’s responsible for paying taxes.
You’ll pay insurance for both leased and owned equipment. In fact, proof of insurance is generally required before you can lease equipment.
When it comes to insurance costs, you’re not likely to see many differences between leased and owned equipment. Purchasing farm equipment outright might give you more flexibility in the type of insurance you get, however.
Remember to Account for the Benefits of Farm Machinery
Who hasn’t thought about how the right equipment could make a job faster and easier? A good seeder or spreader can speed up planting significantly. And a reliable tractor or dozer can make you more productive throughout the season.
From more reliability to less crop loss and comfort when you’re in the field for long days, farm equipment can make a big difference. If you’ve previously leased farm equipment, you probably know exactly how much of an impact that equipment can make for you.
If you’re looking to buy or lease ag equipment in Ohio or West Virginia, contact us to find out about farm machinery like earthmovers and tractors for sale. You can also view our inventory of agricultural equipment online.