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The Magic 8 Ball & Section 179

December 26, 2014

This article was written by Gabe Jarnot, SVP Business Development for Northland Captial Financial Services, LLC. Mr. Jarnot has been in the equipment finance industry for more than 20 years. Environmental Tillage Systems, Inc. and its farm customers have worked with Northland Capital many times to provide successful equipment finance programs.

As a child, I remember receiving the Magic 8 Ball for Christmas, asking it questions and then waiting to see the answers: Very Doubtful, Outlook Good, or Yes Definitely.  This is what 2014 felt like as we all anxiously waited to hear Washington’s decision on Section 179 and bonus depreciation.  

In my career of equipment finance, I work with crop, livestock, and dairy producers all over the country. Many are looking for depreciation, while others are researching alternative options.  During our conversations, my favorite question to ask is, “Can you tell me about your business?”  

Letting owners share their history, scope, and future plans, paints the picture of their operation. As the conversation moves toward their financial picture, searching for the right answer on how best to acquire their production equipment is the question:

  •         Pay Cash & Depreciate? 
  •         Finance & Depreciate?
  •         Lease & Expense? 

After 22 years in the industry, 2014 was an interesting and unique year.  Over the years that Congress extended the increased Section 179 limits and bonus depreciation, and given the strength of the agricultural economy, the answer to those questions were often made early with owners typically using cash or finance to accelerate depreciation.   

However, when the stimulus incentives officially ended December 31, 2013, much of the assets acquired had been fully depreciated leaving very little to off-set income in 2014 or following years.   New questions were being asked, “Do you think Congress will extend Section 179?” “What other options do I have?” Never before have I seen so many balance sheets with large amounts of accumulated depreciation relative to recently acquired assets.  There was a large gap between short- term depreciable assets remaining and long-term depreciable assets on the books.  Therefore, many owners were facing a large tax bill for 2014. 

As they were searching for the  right answer, many owners chose true tax leasing and the expensing of payments as their method of choice because of the:

  •         uncertainty of Washington’s decision
  •         alternative to accelerate write-off versus seven year depreciation
  •         recommendation by their accountants

Finally, the uncertainty of the year came to a close.  The Tax Extender bill was signed into law on December 19, 2014 – stating another temporary extension of Section 179 and 50% bonus depreciation on qualified equipment.

Unfortunately, that left only 12 days to take advantage if you had not purchased qualified equipment earlier in the year.  Secondly, the equipment needed to be in service by year-end.  And thirdly, the uncertainty begins again January 1, 2015.   This raises another new question.   Will we be playing Magic 8 Ball again in 2015?   

There is a better way to manage this. I recently had a conversation with a custom manure pumping operation. This particular owner rotated some of his equipment fleet every 3-4 years. He took advantage of prior years’ tax incentives by paying cash and accelerating depreciation, however, he also balanced some of the equipment purchases with three year leases.  This allowed him to match the expense of that equipment with the revenue it generated, reflecting the true performance of his operation.   

The Magic 8 Ball answer is “Yes Definitely” when it comes to considering all alternative finance options. Leasing is just one of those options. Every operation is unique with no one-size fits all answer, but I encourage you to look long- term at your equipment acquisitions and purchase options, keeping in mind cash and liquidity needs, depreciation and tax implications, and possibly balancing it with leasing and expensing to manage both your short-term and long-term depreciation or expense items. 

ETS offers programs for renting, leasing, and purchasing a SoilWarrior. Let us know if we can help you find the right solution for financing your equipment purchase for 2014/2015. Contact us.

Topics: Financing