When to lease, when to buy – Equipment Purchases

Now that winter is here, producers are sitting down to catch up on their bookkeeping and reviewing their finances. Currently strong prices are being seen for both cattle and grain, and this may lead many producers to consider upgrading their equipment.

A lot of time and effort goes into picking new equipment, and the payment often becomes more of an afterthought, rather than playing an important part in the decision. Leasing the equipment is becoming a more common way to finance equipment, rather than borrowing or purchasing outright.

So how is the decision made on whether to lease or buy? Leasing is often thought to be the tax efficient way to make a purchase, however, in some situations there can be better tax savings to buy the asset, versus leasing it. Many things need to be considered.

The positive side of leas- ing is that there is a minimal, if any, down payment, and often there is a lower payment. There can be a lower payment requirement due at the end of the lease term if it is purchased, freeing up capital for other uses such as land purchases. There can also be a benefit of continually having new equipment with (hopefully) less things to go wrong. These features can result in protecting the cash flow for the farm operation, and that is sometimes a very attractive quality. On the down side, depreciation cannot be claimed on the machinery that is being leased, and lease payments do not build equity.

It is important to consider how long the equipment will be used. Perhaps the machinery may only be required for a limited time, or it will become outdated in the near future. Or perhaps the intention is to upgrade the equipment every few years. A different make of equipment can be tried without a long term commitment. In these cases leasing may be the better option. The lease payments are timely and consistent, and they can also be a tax write-off, which is also attractive.

The positive side of purchasing is that the machinery becomes part of your asset base and shows up on the liability side of your balance sheet if there is a loan. The owner can also write off the depreciation on the equipment, as well as the interest portion of the loan payments. There will also be equity in the equipment when the time comes to upgrade again.

There is no correct answer in the debate without comparing the total leasing cost with the cost of financing. Before you decide to lease or buy, do some cash flow projections and look at the financial impact on your operation. Always consult your accountant to make sure you are looking at the whole story and calculating the benefits and costs for your operation.

For more information stop by or contact your local Regional Office or contact the Agriculture Knowledge Centre at 1-866457-2377.