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Leasing vs. buying equipment

 

University of Kentucky College of Agriculture, Food and Environment

Have you ever wondered which option, buying or leasing a piece of equipment, is a better suit for your operation? While leasing may not be a popular decision as of right now, with the availability of bonus depreciation and Section 179 write-offs as high as they are, a reduction in that expense may lead farmers to look for other alternatives. The decision to lease or buy should be made on a case by case basis because every operation is different. Both options offer advantages and disadvantages.

 

Leasing Equipment: Advantages
1) Preserving capital - Leases require less money up front, so they do not have a major effect on your cash flow. 2) Providing flexibility - Leases are usually easier to obtain and have more flexible terms than loans for buying equipment. 3) Upgrading equipment - Leasing allows individuals to obtain the latest in technology, horsepower, and/or features. 4) Tax deductions - Lease payments are considered production expenses that can be written off when incurred.

Leasing Equipment: disadvantages
1) No ownership - Leased equipment is not considered an asset on your balance sheet. 2) Repair costs - The lessee is typically responsible for repair and maintenance of the equipment. 3) Lease terms - Most leases have a specific time limit on equipment use. Exceeding this limit could greatly increase the cost of leasing equipment, and getting out of a lease may be difficult or costly.

Buying Equipment: Advantages
1) Ownership - Buying equipment gives one the pride of ownership and increases one’s assets, and the number of hours of machinery use doesn't have to be taken into consideration. 2) Tax incentives - Section 179 expense allows $500,000 (subject to a cap if purchases go over $2 million) of purchases in 2013 to be claimed in the first year of ownership; or if the equipment is new, bonus depreciation of 50 percent of the cost. 3) Depreciation deductions - If not all depreciation is taken with Section 179, then the cost of the equipment can be taken over the life of the asset.

Buying Equipment: disadvantages
1) Higher initial cost - A down payment is required for most purchases, and any required loans may tie up lines of credit. 2) Upgrading equipment - Buying exposes one to the risk of it becoming obsolete before the equipment is worn out. 3) Repair costs - Repair costs may rise as machinery ages, but with leasing, the lease may be up before repair costs begin to accumulate.

When trading equipment in on either a lease or a purchase, one thing to consider is depreciation already taken on it. A trade with a purchase allows the depreciation and gain to roll into the new one. However, when trading an owned piece in for one that is going to be leased, the old piece must be shown as a sale and the gain recognized. For instance, if Section 179 expense is taken on a piece of equipment and then traded in on a lease, then the accelerated depreciation must be recaptured and the sale will be shown as a gain.

This article was written by Amanda Jenkins with the Kentucky Farm Business Management Program at the University of Kentucky College of Agriculture, Food and Environment.. The article first appeared in the June edition of the Kentucky Farm Business Management Program state newsletter.