AlB—Lancaster Farming, Saturday, November 21,19*1
Farm equipment leases up sharply, reports USDA
WASHINGTON, D.C. - More
and more farmers are leasing their
equipment Instead of buying.
A recent survey of 131 leasmg
companies indicates that the value
of their outstanding agricultural
leases rose 141 percent between
1979 and 1980. According to this
survey, irngation units are the
most common type of farm
equipment leased, followed by
tractors and harvesting equip
ment, reports USOA’s Economic
Research Service.
Rising machinery prices, loan
rates, and income tax brackets for
some farmers make leasing at
tractive. The Economic Recoveiy
Tax Act of 1981 grants advantages
to corporations and banks that
purchase rental equipment, a
situation fostering desirable
leasmg terms for farmers.
Since leasing requires no
downpayment, it frees that
working capital for defraying the
rapidly rising costs of production
items such as fertilizer, pesticides,
and machinery and repair costs.
Because of IRS classifies lease
payments as fully deductible
business expenses, leasing in
creases the fanner’s after-tax
cash flow over the entire term of
the lease.
With competition in the leasing
market on the rise, lessors often
pass some of their savings in in
vestment tax credits, depreciation,
and interest deductions to the
lessee in the form of lower lease
payments
Financial and operating leases
are the two types currently in use
There are no aggregate data
specifying the extent to which each
type is transacted in the farm
sector.
The costs associated with both
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operating and financial leases are
tax-deductible. However, the short
period of use usually involved with
an operating lease makes the
lower capital investment much
more important than any tax
advantages. With financial leases,
which entail longer-run use of
equipment, the farmer carefully
weighs the tax differences between
leasmg and ownership. •
For the Short Term... Opera ting
Leases
Operating leases are made for
the short term, usually less than a
year. For this reason, rates on an
operating lease are often set on an
hourly, daily, or weekly basis.
Besides offering flexibility,
openting •'--•epe free lessees from
tile tixed COaU, 01
as taxes, insurance, interest, and
depreciation. Such costs per unit ot
time can be excessive if the
equipment is only used for a very
short part of the year, as is often
the case with items such as
comheads.
Although under an operating le
ase the lessee is responsible for
variable costs, including fuel and
routine maintenance, he does not
have to pay for repairs. The lessor
incorporates fixed ownership costs
into the lease payment, but the
amount a farmer pays m this way -
when leasing for short periods of
time - is often less than tus costs ot
ownership would be.
The outlook for operating leases
appears promising. Should the
farm sector become more
dependent on export demand, total
demand for farm output is likely to
show more volatility. In order to
add flexibility to their production
schedules, farmers may need to
use some farm machinery part
time through operating leases.
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The expansion m individual farm
size requires additional equip
ment. With parttime use through
an operating lease, the farmer can
avoid adding to the long-term debt
he may already have incurred in
purchasing additional farmland.
For the Longer Term...Financlal
Leases
Financial leases are usually
extended for between 3 and 4
years, and the lessee is con
tractually bound for the entire
term of the lease Financial leases
are especially attractive because
the payments are fully tax
deductible, whereas with purchase
loans, only the depreciation and
interest portions of payments are
tax deductible.
When buying, the farmer
receives a lb-percent investment
tax credit, which directly reduces
his total tax bill. For fanners with
higher tax liabilities, this credit
declines m significance while the
tax deduction on total lease
payments becomes more
significant.
Although financial leases often
carry a higher implicit interest
cost than comparable loans, the
tax revisions under the Economic
Recovery Tax Act of 1981 have
reduced the after-tax costs relative
to purchase loans The revisions
have extended the inaxu., „u. .
of a lease from one-half of the
useful life of the equipment to 90
percent of its useful life and have
eliminated the limit on lease
payments
For example, the extension ot
the maximum term has allowed
lease payments to correspond to
the amortization of principal and
interest, which are tullly tax
deductible. Previously, the tax
laws had limited the lease term to
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DISTRIBUTOR FOR CABLEVEY
FEED SYSTEMS & SCHULD BINS
Types ol tquipment Leased by the Various Lessors, 1980
Type ot Lessor
Captive
percent ot
items leased
Items Leased
IldLlOlb
Autos
I rucks
Irrigation equipment
Cuam btorage'and handling
equipment
Harvesting equipment
Livestock buildings and
equipment
Livestock
Implements and other
machinery
Non production items
prevent it from serving as a
disguised purchase.
eliminating the limit on lease
payments has allowed farmers to
amortize repayment of the prin
cipal faster. Because under a lease
contract these repayments are
fully tax deductible, the lessee can
realize larger tax savings during
the early part of the lease when the
net present value is highest.
This option can be advantageous
to farmers in high tax brackets,
even if they have an adequate cash
flow to purchase the equipment. In
addition, the variable interest
rates on Production Credit
Association loans mean much
uncertainty about interest
payments. By locking interest
charges into a fixed rate, financial
leases eliminate this uncertainty.
The outlook for financial leasing
also appears favorable. The
consolidation of farms into
larger operations, as well as an
increase in absentee owners with
high off-farm incomes, tends to
increase the average tax bracket
of many farmers. While the
Economic Recovery Tax Act ot
1981 should slow this trend, it
should still increase the tax ad
vantages of financial leases. The
continued volatility of interest
rates at a high level should
likewise enhance farmers’ desire
.tor the tixed-payment privilege
financial leases otter.
Incentives for the Lessors
Kor the lessor, there are many
advantages to leasing instead ot
selling The implicit rate of return
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on a lease often exceeds the ef
fective rate of return on a loan.
Lessors can benefit from an
investment tax credit on equip
ment purchased for leasing, and
they can claim normal
depreciation. Also, after a
financial lease expires, lessors can
often sell the equipment at more
than book value.
Lessors ot farm machinery are
primarily independent com
mercial leasing companies, bank
attiiiated lessors, participation
lessors, and captive lessors af
filiated with manufacturers of
farm equipment.
The independent commercial
leasing companies, which
traditionally have not been heavily
involved in farm equipment
leasing, generate their own
business. They often retain agents
who locate customers. To ensure a
sufficient volume ot business to
compensate tor their high fixed
costs, most commercial leasing
companies lease the more ex
pensive types of farm machinery,
such as tractors and combines.
Participating lessors engage in
joint loans, usually with small
country banks. They provide ex
pertise in exchange tor a servicing
fee, while the country bank
originates the lease. The par
ticipating lessor often holds a
minimum' ot 25 percent of the
lease.
Small local banks have become
very receptive to such
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&
Independent
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