Every piece of farm equipment is an investment. Tractors, especially, are critical to the day-to-day work of operating a farm. Not only do you need dependable equipment, but you also need to make sound financial decisions that provide both short-term and long-term benefits.
Leasing a tractor has long been perceived as a lesser alternative to purchasing, but today’s farmers are reconsidering their options in light of lower farm income and tighter lending requirements. There are pros and cons for both tractor loans and leases, and understanding the key differences can help you decide which one is best suited to your financial situation.
Tractor Loans vs. Tractor Leasing
The primary advantage of a tractor lease are the lower payments compared to a purchase loan. But leasing can also protect you from depreciation. Farm equipment often depreciates quickly, though that is a burden you do not have to bear when leasing a tractor, especially if you are operating during a period when used equipment prices are trending down.
The trade-off is not owning the equipment means you are not able to build equity in the asset. If you purchase your equipment by financing through a loan and are able to build equity, you can get ahead of the debt load and build up the net worth of your operation to improve cash flow.
There are also tax implications to understand and consider before making a decision. Owning a piece of farm equipment allows you to take advantage of the Section 179 tax deduction provision for accelerated depreciation and the separate bonus depreciation option.
Tax law allows for payments toward the rental or leasing of farm assets to be written off as business expenses. But the lease agreement has to meet the Internal Revenue Service’s guidelines, which distinguish between a true lease agreement and a conditional sales contract.
There are a variety of factors that can affect the IRS’s view of your lease agreement, including whether there is a stated or imputed interest value or a true fair-market value buyout schedule. For that reason, farmers will frequently consult with a tax advisor before using potential tax savings as a determining factor in their major equipment purchasing decisions.
At the end of the day, you have to choose what makes the most sense for managing your operation. Leasing can be an appealing option to the owner of a small farm who does not have the acres for a large outlay or a beginning farmer who is hoping to reduce their debt and free up equity to be used to purchase land in the foreseeable future.
Tractor Financing Through John Deere
Once you’ve decided on how you plan to finance your farm equipment, the next decision is finding a partner with whom you can get the financing you need. John Deere Financial is a unique option because of their deep understanding of the industry and unmatched equipment expertise, which enables them to develop and offer customized financing solutions.
They can offer competitive rates and flexible terms, review the tax advantages of loans and leases, and treat you to a down-to-earth approach, no matter the size of your operation.
To get the financing you need to purchase new and used commercial, residential, and agricultural equipment, explore your options with TriGreen Equipment and John Deere Financial.