Basics of Leasing

An interview with Jeff Moser, Farm Credit Leasing

What is a lease, when can leases be used, and how do they work?

A leasing company allows the use of an item that they own, meaning the leasing company, while you pay a periodic lease or rental payment. In essence, you only pay for the use of the equipment or other items rather than paying a principal and interest payment on the loan. Leases are offered on a variety of items. Typically, people think of a lease on a tractor, combine or other piece of equipment. But leases are also available on buildings, greenhouses, solar systems, wine bins, grain storage, wine barrels, vehicles, robotic type equipment, and much more.

Farm Credit Leasing also has a fleet partner program, which offers leases on over the road, trucks, pickups, and other passenger type vehicles. The benefit of leasing vehicles not only helps you from a tax standpoint, but also in the acquisition of a vehicle, as the leasing firm has the buying power to purchase these vehicles direct from the factory as opposed to going through a dealer.

When might a lease make more sense instead of a loan?

There’s a big difference between a loan and lease. Number one is if you borrow the money to purchase an asset, you actually own that asset. You depreciate that asset and it is on your depreciation schedule as long as you own it. With a lease, the leasing company owns the asset and you pay for the use of it as I explained earlier. You receive the write off of that particular lease payment on your taxes as an expense and the leasing company takes the depreciation.

A couple of the big things to consider if you’re comparing a lease to a loan. With a lease, you have some very flexible terms and conditions. Leasing can be provided on 100 percent of the cost of obtaining that asset, which allows you to preserve working capital and your operating lines of credit.

You can customize the payment structure on leases to work into your cash flow timeline. For instance, you can lease something on monthly payments, quarterly payments, semi-annual or annual. Those flexible terms also help you from a cash flow standpoint.

Tax benefits are another great reason to consider a lease due to the possibility that the lease payment will be fully tax deductible as part of your business expense on the asset you are obtaining, as long as the structure is structured as a true lease. The tax benefit is a significant opportunity for most leases. The largest tax benefit involves the shortest term lease on the longest term tax depreciation of that asset. For instance, a multipurpose building that has a 20, 30, or even 39 ½ year tax depreciation. You could lease for anywhere from five to seven years and receive a significant tax benefit by writing off that asset in a quick timeframe compared to the tax depreciation timeframe. This is where you will benefit the most from a lease, especially on buildings and grain storage that would have 10 years or longer tax depreciable life.

Some of our readers might be interested in a purchase leaseback. Could you explain what that is and how it works?

A purchase lease back is when a customer purchases a piece of equipment or constructs a building or other structure during a calendar year. At some point during that year, generally in the third or fourth quarter, a customer determines that they either, number one, are running into a tax liability they did not realize, or number two, have pinched their cash flow for one reason or other. In those cases, they sell that asset to Farm Credit Leasing. The leasing company structures a lease that will give them the benefit of putting cash back into their pocket and creating a lease payment that will fit their particular needs. The fourth quarter of the year is typically when a purchase leaseback makes the biggest sense.

AgChoice Farm Credit specializes in providing farm and country property loans and financial services to help our Martinsburg customers confidently reach their dreams. To learn more about AgChoice and our 105 years of experience, contact us at (814) 793-3783 or visit AgChoice.com.