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Leasing Farm Buildings as Tax Strategy

The leasing of farm equipment is a familiar and proven financing tool. Newer to agriculture is the leasing of farm buildings.

Leasing and leasing optionsWhether they are adding grain bins, machine sheds or livestock facilities to their operations, more producers are choosing leases, primarily as a tax management strategy. Last year, producers had to wait until mid-December for Congress to extend the equipment deduction under Section 179. Lawmakers have given no indication of when, or if, producers can expect an extension for 2015. Leasing can take some of the uncertainty out of the current tax environment.

To determine if leasing is the right for their operation, producers need to consult with their tax advisor. When it makes sense, leasing offers a number of benefits. Among them:

  • Lease payments typically are 100 percent deductible. If producers choose to own a structure, they generally are limited to depreciation and a deduction for interest expenses.
  • Producers can structure leases to fit their specific tax strategy. This is true whether a producer wants accelerated depreciation or no depreciation.
  • Working capital is preserved by eliminating major capital outlays. Producers essentially rent the building after it is completed.
  • The value remaining on a building at the end of a lease can be bought by the producer. Or, ownership can be transferred to the next generation as part of a producer’s transition plan.
  • Lower long-term, fixed rates for producers. A leasing company will hold and depreciate a farm building on its balance sheet. A leasing company such as Farm Credit Leasing might give producers a lower interest rate in exchange for the depreciation.

We often use the example of a $100,000 building to illustrate the potential savings that can be realized through leasing. The example below is based on a 20-percent down payment and a seven-year depreciation schedule. The first column is the amount of depreciation and interest a producer can deduct if he or she is buying the building. The second column assumes the producer is able to deduct the full amount of the lease payment.

 

Total Depreciation/Interest

Lease Payment

Year 1

$3,750.00

$20,000.00

Year 2

$12,153.22

$14,337.90

Year 3

$10,906.22

$14,337.90

Year 4

$9,658.98

$14,337.90

Year 5

$8,401.01

$14.337.90

Year 6

$7,130.06

$14.337.90

Year 7

$5,838.13

$14.337.90

Total Deductions

$57,838.22

$106,027.40

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