Why lease instead of buy? It's something to consider when you're looking at equipment, vehicles, or facilities.
When you research a leasing agreement, you'll find there are a variety of advantages over owning.
The number one reason for leasing instead of getting a loan is for the financial benefits. Leases can help with tax advantages, accelerated write-off, and preserving capital.
First, leasing offers a variety of tax advantages. Not only may lease payments be fully deductible, but expensing lease payments over the term may reduce taxable income.
At GreenStone Farm Credit Services, most of the leases we generate are for facilities, including machine sheds, grain storage, livestock and dairy buildings, greenhouses, and farm office buildings. Leasing a facility like a pole barn with a 20-year tax depreciation, a customer can write off 70-80% of it in five to seven years instead of 20. If a customer is older, he may not want to consider a 20-year tax depreciation, so this offers a better choice for them.
Tax rules can change every year. By utilizing a lease, a borrower can know exactly what expenses to plan for over a longer period. My advice is it’s best to take the tax advantage when you have the opportunity.
Due to the current conversation about changes in estate taxes, it’s important to note leasing also allows owners to seamlessly transfer leased assets to the next generation. This keeps the asset out of the estate, which offers tax benefits. At the time the residual on a lease comes due, the next generation can purchase the assets for the residual amount.
Write-offs vs. depreciation
When looking at options, it’s beneficial for your financial partner to understand the different types of farm businesses, as many can benefit from accelerated write-off.
For example, as a commercial structure, a large veterinarian office has a 39.5-year tax life. However, if that building is leased with a 35% residual, they can write 65% of it off in seven to 10 years, as opposed to depreciating it over 39.5 years.
When you’re looking at options, it’s important you work with an expert who understands how good of a fit a lease agreement might be for the business, as this is considered one of the best benefits.
Save money for other expenses
Sometimes farmers or businesses may not have the cash on hand for a loan down payment, or they may want to use the capital elsewhere even if they do have it. With a lease, customers can preserve working capital. Leasing can provide 100% financing with no down payment required. Obviously, this helps people save money for other expenses, yet still obtain the facility they need to grow the business.
Lease payments can be tailored to fit the customer, including monthly, quarterly, semi-annually, and even seasonally.
When it comes to paying taxes, business owners are always looking for ways to put themselves in a better financial position, and leases are another tool that can help. Flexible lease structures allow you to take advantage of these benefits on facilities of all types and sizes, including:
- Machine sheds and storage buildings
- Grain storage and handling facilities
- Climate controlled buildings
- Livestock and dairy facilities
- Pole barns
- Farm shops
- Commercial buildings, like warehouse and office facilities
Through our partners at Farm Credit Leasing, we’re able to offer this to our members.
For more information, reach out to your local GreenStone branch or visit GreenStoneFCS.com.
*Written for the Michigan Farm News Dollars and Sense Column