Do Alpaca Owners Get Special Tax Breaks?
By Sharon Greene, Snow Diamond Alpacas
Technical Advisor for this article: Todd Harker, CPA
It seems that everyone has an opinion on the alpaca segment
that aired on John Stossel’s show on Fox News in December 2010. Part of a series on Politicians' Top 10 Promises Gone Wrong, the
segment dealt with the tax benefits that are available to alpaca owners. The show
inferred that alpaca breeders get special tax advantages not available to other
taxpayers, and that Uncle Sam’s largesse was the primary reason that many
people got into the business. Some alpaca owners liked the fact that the show
put a spotlight on alpacas, some called the show an attack on our industry, and
some didn’t watch the show but took the opportunity to weigh in anyway.
Good, bad or indifferent, the show got people talking. And that’s when it occurred to me that some of us (myself included) could use a little clarification about the industry’s so-called special tax treatment.
This article is not meant to be tax advice, nor does it provide in-depth information about the tax topics that are highlighted. My “expertise” in tax matters comes from being a taxpayer. That’s it. I’m not a CPA and I’m not a tax attorney. I’m not even much of a bookkeeper. But I do know how to ask questions and do research. And my husband and I work with a very good CPA who has agreed to look over my shoulder as I write this article. So here goes.
Accelerated Depreciation a/k/a Expensing Assets
A lot of the fuss is about Section 179, 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 has fluctuated over the past several years. Under the Small Business Jobs Act (SBJA) of 2010, the limit is $500,000 for 2010 and 2011.
For most active hands-on alpaca breeders, one of the cool things about Section 179 is that deductions from expensed assets can be applied towards other income, not just income that is derived from the business related to such assets. For example, let’s say you earn $75,000 a year as a roofer and report that on your schedule C. You’re also starting to breed alpacas, but so far, your income from the alpaca business is less than your expenses. If you spend $25,000 in 2011 on assets that qualify for section 179, you can elect to fully expense those assets on your 2011 taxes, which would reduce the taxable income you make from your roofing business to $50,000. If you are in the 25% tax bracket, this could save you around $6,000 as well as the 15.3% self-employment tax of $3,825—not enough to pay for the new assets, but enough to take a little of the sting out of what it cost you to buy them.
It should be noted that passive investors (generally those who do not participate in the day-to-day care and decision-making involved in the business) cannot apply this accelerated depreciation to unrelated income. Passive investors can apply the value of expensed assets only to income from the sale of alpacas, their fleece, and other related farm income.
So does Section 179 apply only to alpaca breeders? NO. It applies equally to any business, large or small. Our previous example about the roofer could be reversed, with the established alpaca breeder deciding to start a roofing company. The same tax rules apply, and the costs of starting the roofing business could be applied towards income earned not only from the roofing business, but also from the alpaca business.
Because start-up expenses for alpaca breeders—as well as for other businesses—can be substantial, Section 179 can help start-ups in any industry make it through the expense-intensive initial capitalization phase of their business. And if a business can recoup some of the cost of equipment in the year in which it was placed in service—instead of depreciating a little each year over time—it could free up some capital that might be used to purchase more equipment, hire additional employees or otherwise expand the business and stimulate the economy. At least that’s the theory.
Please note there are other limitations of taking the full section 179 on an annual basis and depending on your entity structure, so please consult a professional tax advisor for your specific situation.
Taxpayers who actively participate in the activities of their alpaca business can deduct the normal expenses associated with running a business. Those expenses can include—but are not limited to—the cost of:
- Hay and other feed
- Farm repairs and maintenance
- Labor hired to run and maintain the farm
- Shearing costs
- Interest payments
- Professional fees
- Marketing and promotion
- Veterinary expenses
- Security for farm and animals
- Breeding fees
- Boarding fees
- Show expenses
- Travel expenses
- Fiber processing
- Advertising and marketing
- Office expenses
- Vehicle expenses
- Industry publications
- Educational seminars
- Membership dues in industry organizations
- Small tools
- Business portion of taxes, utilities, telephone, insurance
Do alpaca farmers get preferential treatment in terms of what they can deduct? Absolutely not. Any business is entitled to deduct legitimate expenses from gross income to get taxable income. This is not a sweetheart deal reserved only for alpaca breeders.
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.
Again, the tax rules on tax-deferred income are not exclusive to alpaca owners. Many businesses and individuals are able to take advantage of this and many other aspects of the federal tax code.
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 take care of their animals, and spend a lot of time building their business. I do not know a single alpaca breeder who got into the business because of the tax breaks. Alpaca breeders are smarter than that. They know that there’s a whole lot more involved in being successful in this business than being able to deduct some of their losses before paying taxes. Most alpaca breeders researched the business carefully before they got into it. They visited alpaca farms, scoured the Internet, and read books. They talked with other breeders, developed business plans, and ran pro formas. They talked with tax advisers, financial planners and marketing consultants. Despite the hard work, alpaca breeders enjoy the lifestyle, they enjoy their alpacas, and they help each other out.
There is nothing inherently evil, immoral or unethical about utilizing tax breaks. Some people may argue that government should not “subsidize” any business in any way—including by creating tax incentives—and should instead let the free market entirely determine who succeeds and who fails. I’m sympathetic to that position, but that’s a discussion for another day. For today, it’s enough to point out that the tax advantages touched on in this article do help alpaca breeders—especially those just getting started—but the tax breaks apply to all qualifying businesses, not just alpaca breeders.
This article has touched on a few provisions of the federal tax code, and additional tax benefits may be available to alpaca owners and breeders at the state, county and local levels. For example, many counties offer lower property tax rates for farms and ranches that qualify for agricultural status. 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 other tax considerations.