Tax Implications of Renting Farm Equipment

Tax Implications of Renting Farm Equipment

When you rent farm equipment, you can save money and get flexible access to equipment with the latest technology. Rentals work well for giving you access to specialized equipment for particular projects. It's often more cost-effective to rent than buy. 

While renting can have many advantages for your business, consider the tax implications of renting before deciding whether it's the right choice. Consider tax details like federal deductions and state-specific guidelines to determine whether renting makes sense.

Tax Laws Regarding Farm Equipment Rental

Before making a decision, familiarize yourself with the laws related to equipment rental for farming. For example, you get a deferred tax gain when moving from owning to leasing. You must recognize the gain on the sale of old equipment before you sell it, which could influence your tax bill. Here are a few other categories to consider regarding farm equipment rental.

Tax Deductions

Equipment rentals fall under necessary business expenses for farming. Because of this classification, you may deduct rental or lease payments as rent. These deductions lower your income and decrease the amount you pay in taxes.

Tax Credits

In some cases, you may gain tax credits for leasing. Rental equipment that meets energy efficiency guidelines or other environmental standards may qualify for credits. These credits can lower the burden of your tax payments, benefiting your bottom line. 

Depreciation

While you can depreciate property you own and use for your business, depreciation doesn't apply to rental equipment. Depreciation of owned equipment allows you to recover the cost of property over time. Since you don't own rentals, they don't qualify for depreciation, though leases sometimes qualify.

One downside of depreciation is that it spreads over several years, unlike tax deductions for rentals. Rentals allow for full deductions in the years you make payments.

Tax Reporting and Documentation

Like all other business expenses for your farm, you'll want to keep a careful record of the costs for rental equipment. This information helps with tax reporting. You will report all farm income and expenses using Schedule F (Form 1040). Rental equipment expenses go on Form 4835, line 22a. 

State-Specific Considerations

Certain states may have particular tax guidelines for farm equipment rentals. You should consider these guidelines in your state before you rent. Your state might have deductions, credits, or regulations that change your taxes. 

Considerations to Make When Renting Farm Equipment

As you consider the tax implications of renting, you'll want to determine whether renting makes sense for your particular use. Here are a few considerations to make concerning taxes for renting farm equipment.

Changes to Your Balance Sheet

Rentals allow you to improve the debt-to-asset ratio because you can owe less than what you own by renting. Reducing your debt-to-asset ratio enhances your financial standing and makes your farm more stable. This stability allows you more money for day-to-day expenses or covering emergencies. Just keep in mind that some banks consider future lease payments debt.

Depreciating Assets

Any asset you own for your farming operation has a depreciating value. Though you can depreciate property you own in your taxes, renting lets you avoid depreciation altogether. This benefit is especially useful for:

  • New farmers trying to keep debt low
  • Small farms that can't justify buying equipment
  • Farms that often swap equipment

Equity Building

When renting, you'll want to consider the impact on your equity. When you own equipment, you can build equity, allowing you to access funds for other operational needs or purchase new equipment. Farmers will likely benefit the most financially when they own several pieces of equipment and rent others. 

Maximizing Your Tax Benefits Through Renting

In many cases, renting provides tax advantages for farming operations. For example, some farmers trade in their farm equipment every year. In doing this, they lose the benefit of built equity and depreciation deductions. 

On the other hand, rentals allow access to the latest equipment models and provide benefits like tax deductions and possible credits. They can also improve your balance sheet and keep you from owning depreciating assets. 

When considering whether renting makes sense for your situation, talk to a financial expert. They can advise you about tax laws and what they'll mean for your operations.

Rent Farm Equipment From The Cat® Rental Store

When you need specialized equipment for short-term use, rentals provide the ideal solution. They can even offer tax benefits like deductions and credits. As you consider whether renting will benefit your operation, take note of the potential tax implications. 

When you need rental farm equipment, The Cat® Rental Store provides a vast selection of tools to equip your operation. We offer access to bulldozers, skid loaders, trenchers, and other useful farm tools. 

Find your nearest location online to rent equipment from us. You can also call us at 1-800-RENT-CAT or contact us online to get a quick quote on farming equipment.