Help from UNCLE SAM
As explained in the Tax Consequences article on our web site, raising alpacas offers very attractive tax advantages. If raised for profit, alpaca-related expenses (from feed to vet care to a barn to the alpacas themselves) can be written off against other income. In addition, there are multiple strategic tax advantages for the alpaca farmer.
If you are currently paying income tax and expect to pay income tax over the next six years, UNCLE SAM will assist you with acquiring and/or adding to your alpaca herd.
Assuming a 50% tax bracket, the deductions for depreciation, which alpacas are eligible for, can save you over 40%, in cash, of your original purchase price over six years. Plus, the Job Creation and Worker Assistance Act of 2002, allows you to take an additional 30% depreciation in the first year of your alpaca purchase. Here are a couple examples, assuming a 50% tax bracket:
More details on these tax advantages are below. If you would like us to compute the after-tax cost of your prospective alpaca purchase, please email us at info@AllAlpacas.com. We will be glad to do a six-year projection that calculates the after-tax cost of your alpacas.
We recommend that you engage an accountant for financial advice in setting up your alpaca business and for determining the proper use of the concepts in this article. The aim of this article discussing IRS rules is to make you more conversant with the issues of taxation.
Tax Deferred Wealth Building
Alpaca breeding allows for wealth building, while deferring tax on your investment’s increased value. Unlike putting your money in a Certificate of Deposit (CD), where any interest earned would be currently taxable, investing in alpaca breeding allows a small herd to grow over time without paying any taxes on the herd’s increased size and value. In addition, alpacas are depreciable, thereby offsetting the amount of tax due – unlike an investment in a CD, a money market account, or the stock market.
IRS Code Section 179 Deduction
The IRS Code Section 179 Deduction is an annual deduction that is available when you purchase certain assets, including breeding alpacas, through December 31. Even if you start your business in the last quarter of this year, the Section 179 deduction can be used to write-off your purchase of up to $24,000 worth of alpacas. IRS Section 179 Deduction Example:
In other words, if you are in the 50% tax bracket the government will reduce your taxes by 50% of the cost of up to $24,000 worth of alpacas in 2002. This deduction is available for all taxpayers. To see how much this will benefit you, simply calculate your tax bracket and multiply it by the amount of your purchases in 2002, up to $24,000. (For a copy of the IRS Section 179 deduction, email us at info@AllAlpacas.com).
Take an Additional 30% Depreciation in Year 1
The recently enacted Job Creation and Worker Assistance Act of 2002 provides additional benefits for alpaca farmers. In an effort to stimulate the economy, Congress is allowing tax payers to take an extra 30% write-off on first year depreciation for most new capital assets (excluding buildings) acquired after September 10, 2001 and before September 11, 2004, that are placed in service before 2005. This additional write-off entitles you to recover more of the cost of a business asset, such as a breeding alpaca, in the year you put it in service.
Non-Taxable Cash Flow
You depreciate alpaca business assets against your total annual income, which includes income from the alpaca business as well as your other income (e.g. your day job). This allows you to expense the historic cost of an alpaca business asset to offset your present income. The effect is to create non-taxable cash flow on a current basis. This benefit is especially attractive in an environment of higher taxes.
Alpacas use a Six Year Write-Off
There are multiple methods of writing-off alpacas. The straight line method allows you to deduct one-fifth of their cost each year, except the first year in which the code allows for a prorated write-off based on the month of your purchase. Unless you purchase your alpacas in January, this method takes six years to fully write-off your alpacas. The Modified Accelerated Costs Recovery System (MACRS) uses a 150% declining balance and a half year convention, which allows alpacas to be written-off in: Year 1 at 15%; Year 2 at 25.5%; Year 3 at 17.85%; Years 4 and 5 at 16.66%; and Year 6 at 8.33%. This accelerated schedule allows for a larger percentage of the assets to be written-off early. The MACRS system is the system preferred by the IRS since it does not require an election. The cost of financing (interest) on your alpaca purchase is also deductible. Many people use cash for their animals so writing-off interest is not an issue. The following two examples demonstrate the benefits of tax deductions derived from an investment in alpacas. These example do not include additional write-offs that can be taken, such as for feed, veterinarian care, supplies, transportation, membership dues, etc.
Financed Example
Our first example assumes (1) a purchase price for a herd of six alpacas of $100,000, (2) you are in an overall tax bracket of 50%, (3) you use IRS Section 179 in year 1, (4) you use the MACRS depreciation method, (5) you finance the herd at 7% interest for 4 years, and (6) you insure the herd for the balance after a 30% down payment. If you would like to receive a customized projection, similar to the following, for your purchase, please email us at info@AllAlpacas.com.
The total after tax cost of purchasing a $100,000 herd for taxpayers in the 50% bracket is $65,014, over six years, including principal, interest, and insurance.
Cash Example
This example follows the same assumptions from the previous example, except it assumes you make a cash purchase.
The after tax cost of the same six alpacas costing $100,000 is $58,999 after 5 years, if you pay cash. In other words, the federal government pays you back $41,001 of your initial $100,000 investment plus insurance in the form of tax savings.
This example shows that you receive the tax benefits of a $41,001 write-off if you are a tax payer in the 50% overall tax bracket for each of the six years. For the same analysis using the 30% or 40$ tax brackets, email us at info@AllAlpacas.com.
Summary
This gives you an overview of some of the tax advantages of owning alpacas. We are not accountants or tax attorneys; these and other important concepts (e.g. tax preference items, other minimum taxes, employment taxes, etc.) should be discussed with a knowledgeable CPA or tax attorney as part of your business plan.
In summary, the major tax advantages of conducting an alpaca business includes depreciation, capital gains treatment, and the benefit of offsetting your ordinary income from other sources with losses from your farming business. In addition, alpaca breeding offers wealth building by deferring taxes on the increased value of your herd.
Back to: Allegheny Alpacas Home Page
To learn more, contact Jack & Jill Reinhart at:
Allegheny Alpacas
(724) 940-4045