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Lease or Finance? What's an Agribusiness to Do?

Are you and your agribusiness looking at replacing equipment and aren’t sure to lease or finance? At Avail CPA, our Agriculture Advisors can help you weigh the pros and cons of each option based on your specific situation and needs. Here are a few of the highlights between leavings vs. financing: 


 

Lease 

Financing 

Tax deduction 

Principal payments are tax deductible 

Interest is deductible if the lease meets certain operating criteria 

No capital cost allowance deduction 

Principal payments are not tax deductible 

Interest is deductible 

Capital cost allowance varies depending on the equipment, usually between 20-30% of the value per year, with only half of the allowance deductible in year one 

Cash flow 

Leases tend to have a shorter term than financing, requiring larger payments in shorter period which can put a strain on cash flows  

Purchasing and financing terms are usually longer than leases, which allow for smaller payments over a longer period, easing cash flow restraints  

Leverage 

If leases meet certain terms, the equipment and lease are not shown on the balance sheet, this can help if an operation has debt covenants for other financing 

Financing will show the equipment and loan on the balance sheet, which can impact the debt covenants that the operation may already have 

Warranty 

Most leases come with maintenance package and have manufacture or dealership warranty, saving maintenance and repair costs 

The operator can claim any maintenance costs incurred as a tax deduction 

The manufacturer and dealership warranties will eventually expire on the equipment and leave the producer with the repair and maintenance obligation 

The operator can claim the maintenance and repair costs for a tax deduction 

Equity in the equipment 

The producer has no rights to the equipment for the term of the lease and must follow the dealership’s terms 

There are leases that have the option to buy/transfer ownership after, but the producer can’t benefit from the equity in the equipment until after the lease is complete 

The producer takes ownership of the equipment and can benefit from the equity in the equipment as the loan is paid down if the equipment is sold 

 

Every agribusiness has a different set of goals and obligations and neither option, leasing or financing, is a one-size fits all solution. The Agriculture Advisors at Avail CPA can work with you in your decision-making process to analyze the cost-benefit and cash flow implications of each option for your farm as well as look at the examine your goals as an agribusiness to ensure you make a choice that is the right fit for now and the future. Give us a call today to see how Avail CPA can help.  

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