The Alpaca Investment
Advantage
In addition to affording a healthy and less
stressful lifestyle, Alpacas offer you a unique way to diversify your
financial portfolio. Unlike conventional investments, alpacas offer tax
deferred wealth building, compound appreciation, and can be insured against
loss.
Insurance- A very important point to remember when considering investment in Alpacas is that they can be insured against loss. This adds peace of mind not offered by other investments.
Tax Deferred Wealth Building-As
your herd grows and increases in value, you are able to postpone
paying income tax until such time as you begin selling offspring.
This is quite an advantage over other investments.
Alpaca Compounding-Another
major benefit of Alpaca ownership is based on the concept of
compounding. Alpacas reproduce almost every year and about half
of their babies are female. When you retain offspring and allow
them to reproduce, this is Alpaca Compounding. This graph, produced
from AOBA data, illustrates typical herd growth over a 10 year
period. The assumption is that you begin with 5 pregnant females
and two males. This growth of 126 animals from the original 7,
is Alpaca Compounding at work. Not many investments appreciate
at such a rate.
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Tax
Advantages of Alpaca Ownership
In addition to tax deferred growth, compounding and insurance against loss, Alpaca ownership also offers many tax advantages. The major advantages are use of depreciation, capital gains treatment, and, for active owners, sheltering income from other sources by expensing farm related business items. If Alpacas are actively raised for profit, all expenses attributable to them can be written off against your income. Expenses include not only feed, fertilizer, and veterinarian care but also depreciation of breeding stock, barns and fences. As mentioned earlier, this can help shelter current cash flow from taxes. Many investors choose to board their Alpacas, leaving their care and maintenance to a third party in an arrangement referred to as agistment. The passive owner may depreciate his or her breeding stock and expense the cost of maintaining the animals. The major difference in tax treatment of active and passive owners is that the passive owner may only deduct losses from his or her investment against the sale of animals and fiber, while the active owner can take the losses against all other income.
The following is a list of deductible expenses. Please note that not all these deductions apply if you are agisting your animals.
- Vehicle mileage for all farm related business miles.
- Fees for farm schedule income tax return preparation
- Interest
- Rent
- Attorney fees
- Farm related travel expenses
- Farm related educational expenses which improve your expertise
- Advertising
- Labor hired to work on farm
- Farm repairs and maintenance
- Tools having a useful life of less than one year
- Farm fuel and oil
- Farm publications
- Breed association dues
- Miscellaneous chemicals (ie: weed killer)
- Real property improvements (ie: barns and equipment)
- Feed
- Veterinary costs
- Depreciation of breeding stock
- Breeding fees
- Fertilizer
- Agistment fees
Hands-on owners must remember that the expenses of maintaining your personal residence may not be deducted and only the farm use portion of such expenses as telephone, utilities, property taxes, accounting, etc may be deducted.
It is also worth noting that an additional benefit of Alpaca ownership rests with the capital gains treatment of certain sale proceeds. The sale of breeding stock qualifies for capital gains treatment whereas any alpacas held for sale (newborns) which you do not intend to hold in your breeding program are classified as ordinary income and are taxed at a higher rate.
No discussion of taxes, as they relate to breeding alpacas, is complete without mention of the Section 179 deduction, which allows the expensing of depreciable business assets. In 2003 this deduction got even better due to the "Jobs and Growth Reconciliation Tax Act", which added a bonus depreciation on depreciable property. Just recently, president Bush signed a new stimulus package in which the Section 179 deduction was increased to $250,000 for 2008 and the Bonus depreciation allowance was increased to 50%
This information was obtained from AOBA and other sources and is believed to be current. However, tax law is complicated and always changing. This is only intended to be a brief overview of some tax benefits and is not intended to provide IRS guidelines. Please visit the AOBA web page for more detailed information. In addition to seeking the assistance of an accountant, we recommend that you send for the IRS publication #225, entitled, The Farmers Tax Guide.
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