July 13, 2021
For many agriculture businesses, fixed assets represent the largest account on the balance sheet. Fixed assets are any physical items that are acquired by a company and are expected to last more than one year. It is essential to set up a depreciation schedule for fixed assets and assign depreciation methods correctly. But, are you also tracking your assets accurately, and have you chosen the best approach for purchasing considering tax deductions?
If you are considering purchasing tractors, shakers, sweepers, and many other large pieces of equipment, utilize a strategic approach to purchasing, tracking, and planning for taxes. These big investment pieces for your operation cost a large amount upfront but can save you money in the long run — and agriculture equipment tends to hold its value very well.
You might not think to conduct an inventory of your fixed assets every year, but it is the best way to develop a complete understanding of what your company owns and determining if assets have been impaired. This activity can be time-consuming but has the potential to save your business money.
If you have not purchased yet, and are considering financing, there are several advantages to taking out an equipment financing loan. The equipment itself acts as collateral for the loan, therefore, the loan will likely have a lower interest rate than other methods of financing, such as an unsecured loan or a credit card. The indicator of risk is the interest rate. Loans are less risky for lenders since they can repossess the collateral and sell it to recoup any losses.
Additionally, lenders will oftentimes finance more than 100% of the equipment’s value, which can include delivery and other charges. This is useful when being conservative about cash flow if you are trying to avoid coming out-of-pocket with your liquid assets.
Another pro is that the interest on an equipment financing loan is tax-deductible. However, there are limits on the tax-deductibility of qualified interest payments. If your company has an annual revenue that exceeds $25 million, you can only deduct interest up to 30% of adjusted taxable income, which is taxable income, adjusted for various subtractions and additions.
On the other hand, some companies may find leasing more attractive than purchasing if their goal is to maximize tax deductions and cash flow. The rising cost of machinery has presented a challenge in cash flow management for producers in recent years and leasing can be a solution to reduce debt and save working capital needed to purchase assets.
In addition to the flexibility that leasing allows, like adjusting the length of term, frequency of payments, and residual value of the equipment at lease-end, machinery lease payments are often lower than loan payments. Leasing can serve as an effective tax management tool.
Some of the other benefits of leasing are:
- Ability to lease for short-term use
- Maintenance and repair costs mount with equipment age
- Ability to upgrade to advanced technology with greater ease
- Lower initial expense
Scheduling and Tools for Tracking Assets
Businesses often lose track of the many assets that they own. The danger here is that without a fixed asset tracking process in place and a completed inventory, you cannot accurately assess depreciation, impairment, need for replacement, and overall return on your investment (ROI).
Once you have the equipment, you will need to keep track of its value, location, and lifespan. Putting to use a Fixed Asset Management System to monitor assets can include tracking an asset’s physical location, which could employ barcodes or even radio-frequency identification (RFID) devices, which monitor value. The systems can even automate asset depreciation, to simplify audit and reporting processes that aid in audit preparation.
In addition to using fixed asset management software, keeping an updated fixed asset listing could be used to lower your property tax bill by reducing the number of assets subject to property tax. A proper asset inventory can also ensure you are not missing out on income opportunities. Once you know what you own, you will also have a better idea of where you could economize — such as, leasing the equipment to other users, or selling unneeded or idle equipment.
If you are looking to chart a plan for tracking and assessing the life expectancy and profitability of your ag operation’s fixed assets, Grimbleby Coleman CPAs may be able to help. We have the knowledge of agriculture accounting and the experience to help you maximize profits. Email firstname.lastname@example.org or contact your accountant directly to see how we can help you with your fixed asset inventory.