Lease or Buy?

[silverback]

We have always bought our new equipment in the past, with the banks help of course.

We now have a possible new accountant who would recommend some leasing, as well as some dealers pushing it.

I am very wary of it, but would like to hear others opinions pro & con, and good or bad experience.

[caseman]

Compare the two against each other.
Everytime I have - the lease has always worked out to cost more.

Sometimes a lease may only require 10%
down which is easier compared to a bank wanting 20% - 25% down but in the end that lease will cost more.

My accountant always cringes when I mention leasing to him.

[bgmb]

Pros of leasing:
- Low capital requirements
- fully tax deductible.

Cons:
- usually higher interest rates than financing.
- sometimes there are usage limits, not so much on farm equipment.

I lease one combine and when i buy bins i will definitely lease them. Leasing bins is a great deal.

Check out these calculators;

http://www.bloomberg.com/invest/calculators/leasebuy.html
http://strategis.ic.gc.ca/epic/site/sof-sdf.nsf/en/h_so03331e.html

[FarmRanger]

Is there a buyout value at the end of the lease? Do you have to come up with additional funds if you use the machine for more hours/miles? These are some of the questions you need to know to make a better decision.

For myself, I also look at the interest rate that is built into the lease. Most salespeople either can’t or won’t tell you this, but if you have a financial calculator and know how to use it you can determine the lease interest rate. To do so you have to know the initial purchase price (present value), the number of payments and timing of the payments, and the buyout value at the end of the lease.
I’ve seen some pretty horrendous interest rates on leases, so having a 100% deductible payment should not be the only consideration.

[lakenheath]

I am a Chartered Accountant. You have to do the math for each and every different farm situtation. The tax advantage of a lease is not all it cracked up to be. We buy everything on our farm. I did the lease versus buy and on our farm purchasing is the best. Our farm is only 4000 acres, the situation is a bit different for larger farms.

[kamichel]

I think has a lot to do with how many investors in the farm operation. Leasing figures in real costs of machinery easier for multiple owners. Myself I have dropped the latest machinery for older more used equiptment. For example the retired combine operators that I employ likely cannot make use of the modern new machines availlable. I am short of good young help and cannot make a new combine pay for itself much less a leased one. I do have the latest planting tool and believe that purchasing is far better off in that department.

[kamichel]

Just one thing. If you have an accountant recommending leasing I would get a different accountant. I would be broke if I leased equiptment. Rely on your own figures and experiences to make your decisions. Pre season maintenance goes a long ways.

[frustrated1]

For us leasing machinery doesn't pencil out. When you buy, the CCA is at 30% and the interest is tax deductable as well so you end up with some tax savings and some equity. Looking strictly at the pennies of the lease, it's not there. We do however lease bins. We need the space but the CCA is only 10%. Short term, large lease payment gives a decent tax deduction and keeps the lease service charge less painful. The most painful thing about the lease companies (at least with bins) is they amortize it over 3 years but then your first payment is up front which makes the effective interest rate very high.
It works for us now as we're generating so many taxable dollars to make land payments on stuff that's almost paid off. ie: same $ payment, very little interest to write off.
Every situation is different for sure. Bottom line for me at this moment: I'd rather give the cash to the lease co. and have my grain in bins than have the grain on the ground and the money in our illustrious govt's hands.

[kamichel]

"Short term, large lease payment gives a decent tax deduction and keeps the lease service charge less painful".
As long as one knows that it is not all about not paying tax but making profit.
If one would want to decide between making a profit and paying some tax , or paying leases and making no profit. One should side with making a profit.
I cannot say that a lease will not work for everyone but one thing it has never worked for me.

[FarmRanger]

It's not much different than buying new.

If the interest rate is the same on the lease as a buy, it might even work out better, depending on your mariginal tax rate.

[terralex]

I have a spreadsheet to help you decide what to do. Enter in things like your interest rate, value, and it will show you the cost of ownership over the cost of leasing.

Just so you know, almost everything that I have entered in works out better to just purchase. (bins are the expection).