Andy Crook, Leasing Representative
Proper resource management is crucial to any successful business operation. Resources of people, equipment, materials and cash flow should be utilized effectively. Financing options like equipment, vehicle or facilities leasing can be another tool in the toolbox to help manage your business. This can be a great way to maximize tax benefits, preserve capital and manage capital expenditures in the most efficient way.
Why Lease?
The old adage of ‘buy things that appreciate, lease things that depreciate’ applies with equipment. Leasing preserves cash, working capital and credit lines for day to day expenses or other projects such as expansions. Leasing can also act as a cash flow management tool with payments being structured to match the operation’s cash flow and any profits generated by the leased equipment. Leases are generally fixed-rate financing and allow the business to lock in a fixed rate to mitigate potential interest rate increases.
Equipment leases typically are the first type of lease that comes to mind when considering this financing option and with good reason - equipment and vehicles used in agriculture are ideal for leasing. With the dramatic pace at which ag equipment is increasing in cost and the rapid technology changes with each new model year, taking advantage of the latest and possibly the most efficient equipment can require a large outlay of cash. A lease can be structured with a replacement cycle in mind. For example, a new planter could be put on a three-year lease. At the end of the lease, there are options to purchase, return or trade in the equipment on a new model. The lease payments cover only those three years, not the full purchase price of the planter. Cash isn’t tied up in equipment and there is flexibility at the end of the lease depending on the needs of your business. A planned replacement cycle ensures access to reliable, low maintenance equipment at all times. There’s also a leasing program for vehicle fleets that are considered in the equipment category. “If farmers, including corporate farm operations, have a fleet of trucks, even over-the-road trucks, they can be leased through our program,” explains Andy Crook, AgGeorgia’s Farm Credit Express and Leasing Ambassador. “Obviously tractors are commonly thought of for lease products, but other excellent possibilities include irrigation and poultry equipment. A few of the less obvious options include refrigeration equipment [coolers], ear tags for cows or dairy farms and wine barrels.”
Under a facilities lease, 100% financing is typically available and there are no down payment requirements. This means minimizing out of pocket costs for down payments or soft costs associated with a project. “With facility leases, AgGeorgia doesn’t take a lien on the real estate [for facilities less than $500,000] which is huge,” said Crook. “Financing for the total construction amount plus soft costs with no down payment is something that AgGeorgia can offer through the leasing program that’s not offered through our convention loan programs. In fact, we’re not aware of any other financing or lending institution that offers this type of leasing option.” Facilities can include barns, equipment storage, greenhouses, grain bins, buying points and even slaughter houses, just to name a few examples. All invoices related to construction are funded and rolled into the lease with only interest on the accumulating principal being due prior to lease commencement. The shortened write-off period with a true lease is particularly attractive to many businesses as well. And while there is an origination fee, no other fees such as appraisal, attorney or closing are incurred.
Maximizing Tax Benefits
Leasing can help businesses maximize tax benefits. Capital expenditures are generally depreciated under a schedule based upon the property. For example, normally a business owner who bought a piece of equipment with a five-year expected life would depreciate the cost of that equipment on their tax return gradually over those five years. By leasing, a business can effectively manage both cash flow and tax benefits during the term of the lease. Under a ‘true lease,’ a business can lease equipment or facilities and write off the lease payments as operating expenses over the term of the lease, reducing taxable income. This type of lease provides the business with level tax deductions in future years. It also offers the ability to shorten the write-off period as compared to traditional depreciation schedules. For example, a machine shed can be placed on a 7 year lease. Typically, a machine shed is depreciated over 20 years. By expensing the lease payments over 7 years rather than depreciating over 20 years, the write-off period is greatly reduced with a lease. A typical true lease on a structure will have a minimum 15% purchase option at the end of the lease and offer flexibility at lease end to purchase or return the equipment, or renew the lease.
By leveraging the various tools available, you can manage and improve your business operationally and financially. “There are tons of opportunities with leasing within AgGeorgia and our territory,” Crook says. “Most folks think their financing need won’t fit into our leasing program but once all the options are explained, many times it does. There’s a lot of opportunity people don’t think about. ”
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For more information on leasing options and to see if leasing is right for you, contact Andy Crook at the Perry Office at 478.987.8300 Ext 224, on his cell phone 478.244.0865, or his email acrook@aggeorgia.com.
Tax incentives can change from year to year and it’s critical to work with your tax advisor to properly plan capital expenditures to take advantage of any potential tax benefits.
