Minding Ag's Business

Depreciate or Lease?

Congress threw U.S. agriculture a curve ball when it let accelerated depreciation virtually vanish in 2014. The popular 50% bonus depreciation sunset Dec. 31. More painful, instead of $500,000 of Sec. 179 capital improvements eligible for first-year tax writeoff, your new limit is only $25,000. (Don't have a panic attack--DTN's tax columnist Andy Biebl expects Congress to retroactively lift that ceiling to $140,000 or so, but that's not set in concrete yet. John McNutt, a consultant with Latta Harris in Tipton, Iowa, speculates the ceiling could be $200,000 or even $250,000.)

Unless Congress acts, someone in a high tax bracket who spent a total of $1.1 million on capital purchases could write off 77% of the costs in 2013, but only 14% this tax year, according to Jack Selzer, an attorney with Seigfreid, Bingham PC, legal counsel to the North American Equipment Dealers Association.

Another way to look at it is that the grower would need to come up with an extra quarter-million dollars of cash or debt to make the purchase in 2014 vs. 2013, Selzer says, so the tax change alone is likely to price some customers out of the purchase. Obviously, that could dampen demand for grain bins, tiling, irrigation or pricey farm equipment.

Zach Reiter, a Cascade, Iowa farmer and short-line equipment dealer, has already seen an uptick in the popularity of leasing. While he thinks $4 corn is more important in curbing some of the frenzy in big-ticket purchases like farm shops or combines, he can still make a case for acquiring labor- and input-efficient tools. For example, variable rate fertilizer application has helped him trim use about 20% compared to broadcast application, he says, and assured nutrients are available when and where the plant needs them. That not only spares his fertilizer budget, it makes a better case with environmentalists concerned about fertilizer runoff in the Mississippi Watershed.

Once you hit the maximum on Sec. 179 purchases, you might want to consider leasing. Annual payments are tax deductible, provided the lease meets IRS requirements. To qualify, the arrangement must be a true lease rather than a financing arrangement where the buyer builds equity in the equipment or has a pre-set price for an option to buy, Selzer cautions.

Lon Frahm who farms 27,000 acres of irrigated corn, dryland corn, dryland wheat, sorghum (milo) and soybeans in Colby, Kan., already has a long track record of leasing rather than purchasing assets. He recently constructed his second, 660,000-bu., $1 million grain bin under a 5-year lease from Farm Credit. He found that more attractive than a traditional depreciation schedule.

"The beauty of leasing is that there's no cap on deductions like there is with Sec. 179 property," Frahm says.

At today's interest rates, McNutt advises clients with cash or credit to purchase equipment or depreciable property outright rather than lease it. "You've got to convince me there's some good reason to lease instead of buy," he says. "Remember, tax-deferral decisions have tails. You shouldn't be making major decisions only on a tax basis."

If you're considering leasing, run the lease versus purchase tool from the University of Illinois to measure the benefits. http://www.farmdoc.illinois.edu/…

Follow me on Twitter@MarciaZTaylor.



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Bonnie Dukowitz
1/14/2014 | 6:35 AM CST
Question Marcia. Raymond lit up my brain cell. I believe the FSFL loan limit is $500,000.00 or does this amount vary by state? Is this correct? Did Mr. Frahm pay 50% down. This is a needed program do to the nations infrastructure not having the capacity to transport commodities as they are harvested and consumed. Thanks
Raymond Simpkins
1/13/2014 | 7:57 AM CST
So how does that work? In 5 years will Farm Credit come in and tear the grain bin down?Or does he already have a lease to own agreement, which is against tax code.