The Jobs and Growth Tax Relief Reconciliation Act of 2003 as well as the Economic Stimulus Act of 2008 offer tremendous benefits to alpaca owners and breeders.
The Section 179 of the tax code has been raised to $250,000 worth of deductions of new and used personal property assets in the year you place them in service.
Please refer to IRS Publication 225, “Farmer Tax guide” for more information. It can be attained at the IRS website http://www.irs.gov.
Would you like to trim your tax liability 5-15% or more? Alpacas may be your answer. Instead of paying Uncle Sam the normal 35% +/-, you can choose to enhance your real estate, purchase animals, and deduct expenses directly against earned income. If you prefer to agist or board the animals, you can capture the expenses and cost of the animals against passive income now and 15 years into the future. Tax deferred wealth building is another benefit. Taxes are postponed on the increased value until you are ready to start selling the offspring.
Many alpaca breeders throughout the United States have recognized financial and personal freedom. The rewards are many. Their initial investment has grown to a level that permits early independence. Individuals have recognized that their current careers can be incorporated into alpaca breeding with positive results.
Raising Alpacas on Your Own Property
First you must establish that you are actively involved in the business and desire to make a profit. Alpaca ownership suggests you:
- Operate the farm in a business-like manner
- Depend to some degree on income from your farm
- Calculate that losses are circumstantial and are beyond your control or are normal in the start up phase.
- Change your operations to increase profits
- Conduct operation as a business, not a hobby
- Even if you are a passive investor you will still be allowed the following tax benefits. The only question remains as to whether you can take the deductions on a current basis.
- Vehicle mileage for all ranch business
- Fees for income tax return
- Labor hired to run the ranch
- Depreciation of real property such as barns and equipment
Also refer to Section 179 from the IRS that allows a substantial deduction each year for expenses.
Please note that once you have determined either a net income or loss, that amount is included on the tax return. It is either an addition to or a deduction from ordinary income. Losses can be carried back for 3 years and forward for 15 years. To deduct any loss, you must be at risk for an amount equal to or exceeding the losses claimed. The “Risk Factor” is
- The amount of money you contribute
- The amount of money you borrowed
The passive owner’s losses that are in excess of current income can be carried forward and taken against future income. Timing is the issue.
Alpacas in which you have cost basis can be written off over 5, 7, or 10 years if there are being held as breeding stock. Straight line or accelerated schedules allow for a percentage of the asset to be written off. Example: An alpaca is purchased for $20,000, depreciated for 2.5 years or 50% of its value and then resold for $20,000. There would be a gain for tax purposes of $10,000. Result = The adjusted cost basis is deducted from your sale price to determine gain or loss.
Capital Gain Treatment: The sale of breeding stock qualifies for capital gains treatment. Please note that newborn crias that are not intended for breeding purposes would be considered inventory
Property Tax Reduction
Raising alpacas may qualify your land for agricultural property tax deferral. Based on your state, classifying your property for agricultural purposes, meeting state requirements could reduce your property taxes. Please check your state and local laws for agricultural classification and property tax.
Tax Deferred Wealth Building
Alpaca breeding also allows for wealth building, while deferring tax on your investment’s increased value. A small farmer can purchase several alpacas and then allow their herd to grow over time without paying tax on its increased size and value. If the same amount of money was invested in a Certificate of Deposit, any interest earned would be currently taxable. In addition, the C.D. could not be depreciated, thereby offsetting the amount of tax due.
This information was obtained from AOBA and other sources and is believed to be current. However, tax planning law is complicated and always changing. Those considering entering the alpaca industry should engage an accountant for advice in setting up your books and determining the proper use of the concepts discussed in this section. A very helpful IRS publication, #225, entitled The Farmer’s Tax Guide, can be obtained from your local IRS office. The goal of this discussion of IRS rules is to provide the guidelines for discussion with your accountants and financial advisors so that you can be more conversant in the issues of taxation as they relate to raising alpacas.