08 20 2015

How To Reduce Operating Costs for Farmers

08 20 2015

How Farmers Can Reduce Operating Costs

Without access to heavy equipment leasing, the costs that go into farming can greatly hinder a farmer’s ability to operate a profitable agricultural enterprise. These costs include the land, seeds, labor to farm the land and plant the seeds, equipment to make the job less arduous and energy to power the equipment. The machinery and equipment alone can be a major cost in a farmer’s operating budget. Bigger equipment and technological upgrades to machinery have driven up the price of farming costs. Due to this increase in costs, any way a farmer can reduce the overhead expenses associated with agricultural endeavors is a welcome relief.

There are several useful ways farmers can reduce their operating costs to ensure a higher return on their agricultural enterprise. Good machinery managers who make informed choices about acquiring their equipment, trading it and carefully calculating capacity investment can reduce machinery costs by as much as $25 per acre, according to the Iowa State University Ag Decision. One of the best ways to accomplish a reduction in the costs associated with farming is for farmers to finance or lease their farming equipment.

Machinery costs and leasing perks

There are two ways to categorize farming equipment costs. The first method, the annual ownership costs, will occur whether the farmer uses the machinery daily or once a year, and includes equipment depreciation, interest on payments, taxes, insurance and storing the machinery. The operating costs include energy, labor, lubrication and maintenance expenses.

By financing or leasing equipment instead of buying it, farmers can mitigate many of these costs. Leasing reduces the amount of the initial expense of buying the equipment because buying typically requires a substantial down payment.

Leasing equipment ensures farmers stay up to date on the latest technological development with the machinery. Buying a bulky machine that becomes obsolete before the owner pays it off can become a burden rather than an asset.

Obtaining farming equipment through a lease provides more beneficial terms for the lessee. Farmers, especially those with bad credit, will have an easier time finding credit for leasing the equipment rather than getting a business loan to buy it.

Utilize Section 179

In addition to the straight-forward perks of leasing equipment, the government also provides incentives for small businesses – including farmers – to save money through Section 179 of the tax code. Since the government categorizes the payments for leased equipment as off-balance sheet operating expenses, this portion of the tax code lets small businesses write off 100 percent of their equipment leasing payments as a tax deduction.

The IRS does not consider leased equipment as an asset so the Alternative Minimum Tax rule will not affect your tax filings. Since some tax benefits can significantly reduce the amount a business owes in taxes, the AMT creates a threshold for how much can be written off, but leased equipment sidesteps this minimum amount.

Leasing heavy machinery has many benefits for farmers looking for ways to decrease overhead while still ensuring they have high-end equipment.

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