The major tax advantages of conducting an alpaca business include the employment of expensing capital assets depreciation, capital gains treatment, and the benefit of offsetting your ordinary income from other sources with losses from your alpaca farming business. Wealth building by deferring taxes on the increased value of your herd is also a big plus.
A new rule in 2003 added several powerful incentives for people buying alpacas. 1) The 179 deduction raised from $25,000 to $100,000, and 2) The bill raised the 30% bonus depreciation to 50% in the first year of purchase.
If alpacas are raised for profit , all the expenses attributable to the endeavor can be written off against your income. Expenses would include not only feed, fertilizer, veterinarian care, etc., but depreciation of such tangible property as breeding stock, barns and fences, all of which can help shelter current cash flow from tax. Beyond these basics there are several strategic tax advantages for the alpaca farmer.
Essentially, Uncle Sam will pay for a portion of the cost of acquiring your alpaca herd, assuming you are currently paying income tax and plan to continue paying income tax over the next six years. You can write 100% of your original purchase price off, up to a maximum of $100,000, in the year of purchase. If you are in the 45% tax bracket, the deductions for depreciation that the animals are eligible for may save you up to 45% in cash of your original purchase price.
If you were to buy ten female alpacas for $150,000, pay $50,000 down, and take advantage of IRS code section 179 and the 50% bonus depreciation, insure the animals and finance the balance over 4 years, the government would give you a tax refund of $60,987 and you would have cash out of pocket of $5,719 in the first year. This assumes you are in a 45% tax bracket (state & federal). The total after tax cost of your $150,000 would be $106,798. In other words, your tax refunds would pay for $43,202 worth of your purchase.
Raising livestock can offer the alpaca breeder very attractive tax advantages. I recommend that you engage an accountant for advice in setting up your books and determining the proper use of the concepts discussed in this article.
If you would like more information or have questions regarding this topic, please contact us via email or phone at 406-579-4055.