Why Buy When You Can Lease?
As the president of Advanced Growth Group, growers always ask me, “Why would I want to lease when I could buy an item and own it?” My best answer is that you can lease to own and get all your tax money back faster. That way, you get the best of both worlds. The idea that leasing is for those who can’t afford to buy is a huge misconception.
There are many advantages to leasing, depending on the direction you want your business to take. Leasing items rather than buying them can help grow a business by creating better cash flow at the right times. A lease can also be beneficial when you are thinking about selling or transitioning ownership of your business. Today, 90 per cent of the leasing we do is geared toward helping business owners better utilize their tax dollars. It is very difficult to increase your business and maintain a healthy cash flow and still keep the taxman happy. Leasing tools offer a strategic fit for many different kinds of assets and operations.
Most banks and brokers make the mistake of painting everyone with the same brush, but all growers have different goals. No two clients are the same, and that’s definitely an aspect of my business that I enjoy.
One of the most under-utilized benefits of leasing is the flexibility that it offers.
By flexibility, I mean that there are different ways of taking advantage of utilizing payments at key times. When you lease you are allowed to pull one payment ahead to take advantage of the tax break it presents—but only one payment. This is why semi-annual and annual payments are very common in a tax-style lease structure: they allow you the ability to move larger sums ahead if needed. When you purchase an asset, your depreciation is fixed, because you can’t move depreciation credits. When you have a good year, why not take advantage of it, and offset it with an extra payment? The next season could be very much the opposite, where you may not need the extra write-off. In this type of situation, leasing can help with future cash flow.
Leasing also offers flexibility in terms of who is going to take advantage of the lease write-off. In situations where family members farm together but have separate identities, and need the flexibility of moving payment responsibilities back and forth, leasing can be more effective than buying. Whoever makes the payment can receive the benefit of the write-off, and this can change year to year if necessary.
An important part of leasing is deciding how you will capitalize it at the end of the term—or whether you will capitalize it at all, or trade it or sell it beforehand. You have a lot of options. This should be discussed prior to entering the lease, as these options can be very beneficial for farm transitions or farm sales.
Leasable assets can include any of the following:
- grain bins, scales and drying systems;
- potato storage facilities;
- irrigation equipment;
- equipment sheds;
- pull-type farm equipment;
- self-propelled farm equipment; and
- GPS and electronics.
For example, a storage shed for equipment, produce or general storage is a class 6 item that falls under a 10 per cent depreciable asset class. In the first year, you are allowed half of that allowance. If you were to purchase a shed for $100,000 you would receive a benefit of $5,000 in the first year. If you were to lease this item, your first and second payments could be utilized for that first year. This could change the tax situation very quickly for someone in a taxable situation.
Relationships Are Key
The hardest part of my business is educating my clients on all of the options available to them. Many growers have limited information about what leasing can do in the right situations. At Advanced Growth Group, we rely heavily on our relationships with accountants and financial planners, and this adds value to our work. This business is complicated, and these days it requires more expertise than ever. We are independent consultants and brokers—we work for you, not the bank.
For more information on leasing options, please contact Dwight Logeot at 204-573-7787 or [email protected].