There has been a long-standing stigma around leasing that suggests that leasing is shameful. Some believe that leasing is something someone does when they can’t afford to own. In that old-fashioned view, to own, to possess a piece of farm equipment is a source of honour and a show of a fiscally responsible operation. These adages, however old, are losing steam.
However, leasing equipment is gaining ground as an option for farmers, bucking old trends and calling into question long-standing stigmas.
“There are farmers in the area who are leasing; it’s getting a lot more common,”
Wendell Ewert, partner and accountant at BDO Canada, said. Ewert’s firm, nested amid the agricultural hotbed of southern Manitoba, offers financial advise and tax help to many farmers in the area.
Any discussion surrounding leasing versus buying is naturally framed in their respective tax incentives or drawbacks.
Making the choice
“Each individual has to assess their equipment decisions on their own merits. One of the biggest costs in farming is pretension,” business management specialist Ted Nibourg said in an FCC article. “In my experience, and I’ve been at this a number of years, there’s probably more prosperity in older but well-maintained equipment than there is in a bunch of shiny paint. I like to say that farmers have to farm for themselves and not their neighbours.”
For some farmers, ownership, in agriculture and nearly every other facet of life, is a prize, a badge of honour. Nibourg’s point about farmers needing to farm for themselves and be less concerned with the gloss of their machinery illustrates an advantage specific to owning. Other heralded pros to ownership include the ability to:
- claim operating expenses;
- claim the interest on your loans as a business expense;
- claim depreciation on the equipment; and,
- build equity.
There are also advantages to leasing. Mainly, they allow farmers to preserve their business’s working capital, which is important, as manufacturers continue to produce larger, more-expensive machinery.
Typically, leases last around the five-year mark and can be tailored to the unique equipment needs of each farmer; flexibility on rate and time. The equipment remains the property of the dealership and a buy-out is offered to the farmer after the lease run is over.
A slight departure, but worth mentioning is that some farmers, mostly in colony-like or large-scale operations, have a special relationship with equipment dealers whereby a flat fee is paid and machinery is provided each year.
Leasing equipment can benefit a farm in the throes of expansion or growth trajectory, freeing up capital to invest in assets such as land or storage. The famer is then able to risks minimal short-term capital on brand new, reliable machinery.
Manufactures like John Deere and CaseIH have their own in-house finance houses and can compete with bank rates on loans, leases, and other financing options. In some cases, lease rates may be lower on a straight per-year payment than financing through a bank or equipment company.
For farms looking to invest heavily in other assets, leasing has the attractive advantage of not showing up on the business balance sheet.
“Generally, leasing doesn’t show up as an asset or a liability,” Ewert said. “It’s off-balance sheet financing. If I buy a $100K tractor, I show a $100K asset and $100K debt. If you’ve got debt covenants, that could be a problem.”
Many farmers are leveraged and want to avoid the pitfalls of being over-leveraged and for them, leasing is a viable option.
Navigating the tax implications for any farm asset can be a challenge, but generally when leasing 100 per cent of the lease expenses can be written off against the farm’s income. If you buy the machine, write offs may be limited to an annual capital-cost allowance on a declining balance.
To say one decision is better than the other would be unfair and blind to the variety of specialized options farmers have when acquiring new or used machinery. There is a lot of information online and in print that will further help with the decision making process. But, if you are in the market, be sure to get a cost-benefit and cash flow analyses from your accountant and weigh all the options, tradition and stigmas aside. †