When considering whether or not to replace equipment, income tax situations are not the most important issues to consider. In a profitable year, purchasing equipment is often used as a means of reducing tax liability. "Income tax considerations as the dominating reason in replacement of machinery sends shivers up my spine," says Craig Gibson, a farm management specialist with the University of Kentucky Cooperative Extension Service..
"There are more important reasons."
Size and scale of farm operations, timeliness, cost, technology advances, reliability, condition of machinery, and financial considerations are all above tax considerations, Gibson said.
Properly maintained equipment is one key to profitable farming. But equipment costs must be managed as machinery costs are the highest component in corn and soybean production after land costs.
Machinery replacements should be planned, Gibson said. They should include a planning period of three to five years.
When considering whether to attain equipment, farmers have several options. They can keep and repair their present equipment, trade for new machinery, trade for use equipment, use a custom operator, lease a machine or rent one.
The desirable method of gaining use to machinery is dependent upon business stability, profitability and the production system, Gibson says.
One method of making a machinery acquisition decision is determining the net unit cost per unit of use, he adds.
A farmer can use net unit cost per acre to obtain a reliable comparison of alternatives. It is best if a farmer uses his own data on depreciation, machine value, taxes, insurance, storage, repair, timeliness and financing costs in making a decision model.
In general, the issue should be gaining control of the use of a machine at the least cost. There are no general rules. False economics can be used to justify any decision.
Too often, emphasis in gaining control of larger, newer or added machinery is given to something other than true economic considerations.
Principal loan payments on machinery should approximate depreciation taken annually, or at least not substantially exceed the annual depreciation.
Without proper considerations, producers can potentially find themselves with equipment worth less than the loan balance, larger annual machinery payments than are affordable, an inability to gain financing for needed equipment and overall inefficiencies in the business, Gibson says.