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Blog

December 21, 2016 by Ryan Kitchen

The advantages of leasing farm equipment

Historically, farmers running successful businesses have preferred buying equipment to leasing, as it allows them to own assets with value that they can sell in the future. Many farmers also believe there is a stigma associated with leasing, as it suggests that that they can’t afford to buy farm equipment and, therefore, don’t have a healthy farm. However, there are many overlooked advantages to leasing, rather than buying. For farmers who are struggling to obtain financing – or simply want to consider the alternatives – leasing is usually a viable option.

Get a quicker write-off

In some cases, farmers prefer leasing because it helps their tax position and could possibly give them a much quicker write-off. If you purchase an asset, it goes into your Undepreciated Capital Cost (UCC) pool and you have to depreciate it over time. Depending on the type of equipment that you’re buying, the write-off could take quite a few years. However, with an operating lease, whatever amount you actually pay in any given year is the amount you write-off, rapidly accelerating this process.

Keep your farm modern

In some cases, leasing gives you the opportunity to get more advanced farm equipment. Even if you purchase the most cutting edge equipment, it will eventually be out of date. It’s still possible to sell this equipment, but it will be extremely difficult to recoup your investment. Rather than accumulate outdated machinery that is rapidly losing its value, farmers can lease the latest machinery, making it relatively painless to upgrade as new technological advances become available.

Be sure to consider the terms

Once a client has decided they want to lease, I always tell them to carefully examine the terms of the lease. If the amount you are being asked to pay on the lease over time is more than it would cost to buy and finance that exact same asset, there might be a greater benefit to buying.

A leasing concern

One concern with leasing is that there will eventually be a buy-out on that piece of equipment and that forms part of your cost. Somewhere down the road when you dispose of that piece of equipment, it could give rise to a capital gain that will result in some tax issues. You probably won’t get that if you buy the asset because it is highly unlikely it will give rise to a capital gain.

To lease or to buy?

Ultimately, it’s impossible to say that leasing is better than buying or vice versa. It’s always necessary to compare the two options and weigh your needs, assets and the overall cost (in the long run) of both choices. Always be sure to compare the pros and cons before you make your final decision.

Ryan Kitchen, B.Comm., CPA, CA, has a wide range of experience in assurance, tax and consulting. He specializes in providing income tax planning to individuals and corporations in the agricultural industry, as well as assurance services for municipalities.

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Meet the Author

Ryan Kitchen Ryan Kitchen
Yorkton, Saskatchewan
D (306) 786-4590
E .(JavaScript must be enabled to view this email address)