Tax Breaks for Alpaca Owners - Fact or Myth?

The good news (for alpaca owners) is that the federal tax code does, indeed, offer opportunities for some alpaca owners to save money on their tax bill. The good news for everybody else is that these same benefits are available for virtually every qualified business.

Accelerated Depreciation
Section 179 is a part of the federal tax code that—among other things—allows qualifying taxpayers the option of treating certain property as an expense (instead of a depreciable asset) and deducting it in the year in which the property is placed in service (instead of depreciating it over several years). The amount of depreciable business assets that can be expensed under Section 179 is $500,000 for 2010 and 2011.

For most active, hands-on alpaca breeders, deductions from expensed assets can be applied towards any business income, not just income from the business related to such assets. Passive investors (generally those who do not participate in the day-to-day care and decision-making involved in the business) can apply the value of expensed assets only to income from the sale of alpacas, their fleece, and other related farm income.

Deductible Expenses
Hands-on breeders who actively participate in their alpaca business can deduct the normal expenses associated with running a business. For alpaca farmers, those expenses can include the cost of feed, fertilizer, seed, farm repairs and maintenance, shearing, marketing, vet expenses, security, breeding fees, boarding, show and travel expenses, fiber processing, office expenses, vehicle expenses, small tools, and the business portion of taxes, utilities, telephone and insurance, among others.

Tax-Deferred Wealth Building
Alpaca farmers or investors can purchase several alpacas and then allow their herd to grow over time without paying income tax on its increased size and value until the animals are sold. This is the same tax rule that applies to any cattle farmer. . It works just like it does for employees who receive stock options from their employers and do not pay tax until the options are exercised.

Alpaca Breeders Are Special; Their Tax Breaks Aren’t
The alpaca owners I know work hard, invest a considerable amount of money to purchase and care for their animals, and spend a lot of time building their business. Anyone who says that they got into the business because of the tax breaks for alpaca owners is not doing enough homework. Alpaca breeders know that there’s more involved in being successful than being able to deduct some of their losses before paying taxes.

This article has touched on a few provisions of the federal tax code, and additional tax breaks for alpaca owners may be available at the state, county and local levels. Be sure to check with the taxing entities where you do business, as well as your tax adviser, on whether or not your alpaca business qualifies for these or other tax considerations.