Get an Early Start On Future Equipment Needs by Planning Strategic Farm Equipment Purchases

Posted on: March 27th, 2024 by

There’s no need to check your calendar upon reading this to make sure it’s flipped to the right month—it is still just March!

Farm Equipment Purhcase Negotiation

While it is more common for financial advisors to check in with their farming clients about potential advantages of new farm equipment purchases and leases in the later months of the year, to beat the December 31 deadline in planning their following spring’s income tax filing, thinking further ahead for such sizable purchases may be a wise idea. Beginning the decision process now gives you extra months of consideration and weighing your options, not to mention keeping an eye on sellers for ideal pricing.

If you feel 2024 is the time to buy a new tractor, planter, feed mixer, grain cart—whatever you believe you need—first, consider your operation. Are you earning a profit? If you buy the new equipment outright or finance it, will you still be earning a profit with the payments? If the answer to either of these questions is “no,” it is likely not a good time to commit to that kind of expense.

Your farm is a business, and the goal is to earn more than you spend. Any expenses for that business should enhance its ability to maintain or increase its profit. This includes the gamut of purchasing new (or used—but new to you) equipment to enjoy tax advantages. Section 179 deductions allow you to deduct up to $1.16 million in qualifying equipment necessary to the operation of your farm business either wholly, or in part while amortizing the balance of the value.

Your accountant or tax advisor can go into more detail about the specific requirements of the federal tax code. Depending on what equipment you’re considering, its cost, its use, and return on investment might indeed put you in a better position after taking into account the tax advantages. But if you buy something only to shield any profit from taxes and it doesn’t satisfy these other business tenets, you may find the advantages do not outweigh the costs.

Remember, if farming is your vocation instead of merely a lifestyle your overall goal is not to minimize the taxes you pay, but to maximize farm profit. Don’t let temporary savings override good long-range planning.

What are the alternatives?

Consider the non-tax reasons to consider an equipment purchase. Do you truly need it, or do you just want the newest or prettiest model?

Farmers for whom agriculture is more of a lifestyle than a vocation and have significant outside sources of income or capital do not have the same limitations as those who must carefully budget and plan their capital expenditures. If farming is merely a lifestyle then profit and loss are secondary, the primary goal is to enjoy farming while not costing too much. If instead farming is your vocation, the means by which you put food on the table for yourself and your family, resist the urge to try “keeping up with the Joneses” by going into unnecessary debt.

Farm Equipment ready for Purchase

Say you really do need new equipment, and that your tractor, combine, sprayer, or whatever doesn’t work as well as it once did, is no longer the right size or horsepower for the demands of the job, or is costing you more in increased labor or fuel. Is there an alternative to a new purchase? For instance, if you don’t use the equipment often enough to justify ownership cost or a monthly lease payment, you could rent a newer or bigger one from a dealership as needed. Or you could hire an independent contractor to come in with their own equipment to do the work. Either of these is likely to be less expensive.

If you really need new equipment to use more often, perhaps there is a way to lessen the possible cost. Is there a family member who also farms, or a trusted neighbor, with whom you could split the cost and rotate its usage? If not, and you alone are on the hook, consider carefully what your needs are and if you can get by with a used or smaller model, less horsepower, or a different brand name.

In summary: Consider your whole farm business and how each asset, current or additional, fits into its smooth operation!

Even if you can’t afford equipment this year, this is a good exercise for reviewing your farm business and its assets, debts, and profit margin. If you find your expenses and debt are more than you realized and would like assistance in reviewing your options, Ag & Business Legal Strategies would be happy to discuss your situation and to see where we can help.

At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy. Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow.

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Categories: Farm Business, Financial


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