TAX CONSEQUENCES OF OWNING ALPACAS-

The main difference between a hands-on or active farmer and a passive owner involves the passive owner's ability to deduct his investment losses against his other income. The passive investor may only be able to deduct losses from his investment against gain from the sale of animals and fleece. The active farmer can take the losses against his other income.

For a much more detailed discussion on tax consequences and benefits, please refer to the AOBA website, under investment potential then tax consequences or click on the link here.

ALPACA TAX INFO - Click Here

We recommend that you engage an accountant for advice in setting up your books and determining the proper use of the concepts. One that is familiar with Alpaca is very helpful in understanding the unique characteristics vs other livestock.

A very helpful IRS publication, #225, entitled The Farmers Tax Guide, can be obtained from your IRS office.

There is also a direct write-off (expense) method known as Section 179 that allows a substantial deduction each tax year for newly acquired items that are normally long-term depreciable assets. This allows for the hyper-depreciation of up to $24,000 in 2001 and 2002, and will increase to $25,000 for the year 2003 and beyond. While this is subject to several limitations, it is widely utilized by small farms to accelerate expense, if that is appropriate for your tax situation. For more details on this item, please click on the purple link above.

The capital gains treatment of sale proceeds has become an even more attractive benefit of investing in alpaca breeding stock due to the 1997 Tax Act reduction in the capital gains tax rate to a top rate of 20% (from 28%) for assets held long-term (over 12 months). For more details, please click on the link above.

The new 2003 Jobs and Growth Reconciliation Tax Act has increased the benefits to those buying alpaca. The 179 deduction has been raised from $25,000 to $100,000 and the 30% bonus depreciation was raised to 50% in the first year of purchase. These benefits are for assets placed in service after May 5, 2003 and they expire in December 2004. Click here for the IRS publication.

In summary, the major tax advantages of alpaca ownership include the employment of depreciation, capital gains treatment, and if you are an active hands-on owner, the benefit of offsetting your ordinary income from other sources with expenses from your farming business. Wealth building by deferring taxes on the increased value of your herd is also a big plus. It pays to keep your eye on the tax law changes instituted by Congress.