FINANCIAL AND LIFESTYLE INVESTMENTS
I wanted to clarify theindustry's so-called special tax treatment.This article is not tax advice, nor does itprovide in-depth information about the highlighted tax topics. Any personlooking into buying and breeding alpacas should contact their accountant aboutany questions they may have. Marc and I found an advisor that had experiencewith livestock and tax benefits before we dove into ownership of them.For most active, hands-on alpaca breeders,one of the cool things about Section 179 is that deductions from expensedassets can be applied towards other income, not just income derived from thebusiness related to such purchases.For example, let's say you earn $75,000 a year as a carpenter and report thaton your Schedule C. You're also starting to breed alpacas, but so far, yourincome 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 fullyexpense those assets on your 2011 taxes, which would reduce the taxable incomeyou make from your construction business to $50,000. If you are in the 25% taxbracket, this could save you around $6,000 as well as the 15.3% self-employmenttax of $3,825—not enough to pay for the new assets, but enough to take a littlebite out of what it costs you to buy them. Passive investors (pet alpaca owners, generally those who do not participate inthe day-to-day care and decision-making involved in the business) cannot applythis accelerated depreciation to unrelated income. Passive investors can usethe value of expensed assets only to pay from the sale of alpacas, theirfleece, and other related farm income.So does Section 179 apply only to alpaca breeders? NO. It applies equallyto any business, large or small. Our previous example about the carpenter couldbe reversed, with the established alpaca breeder deciding to start aconstruction company. The same tax rules apply.
Because start-up expenses for alpaca breeders and other businesses can besubstantial, Section 179 can help start-ups in any industry make it through theirbusiness's expense-intensive initial capitalization phase. Please note thereare other limitations of taking the entire section 179 on an annual basis anddepending on your entity structure, so please consult a professional taxadvisor for your specific situation.Taxpayers who actively participate in the activities of their alpaca businesscan deduct the typical expenses associated with running a business. Thoseexpenses can include—but are not limited to—the cost of:Hay and other feedFertilizerSeedFarm repairs and maintenanceLabor hired to work and maintain the ranchShearing costs (typically once per year)Interest paymentsProfessional fees (Accountants, etc.)Marketing and promotionVeterinary expensesSecurity for farms and animalsBreeding feesBoarding feesShow expensesTravel expensesFiber processingAdvertising and marketingOffice expensesVehicle expensesIndustry publicationsEducational seminarsMembership dues in industry organizationsSmall toolsThe business portion of taxes, utilities, telephone, insuranceDo alpaca farmers get preferential treatment in terms of what they candeduct? Not. Any business can deduct legitimate expenses from grossincome to earn taxable income.
Alpaca farmers or investors can purchase several alpacas and then allow theirherd to grow over time without paying income tax on its increased size andvalue until you sell the animals. Cattle farmers receive the same taxrule. It works like employees who receive stock options from theiremployers and do not pay tax until the options are exercised. Again, thetax rules on tax-deferred income are not exclusive to alpaca owners. Manybusinesses and individuals can take advantage of this and many other aspects ofthe federal tax code.There is nothing inherently evil, immoral or unethical about utilizing taxbreaks. Some people may argue that the government should not "subsidize"any business in any way—including by creating tax incentives—and instead letthe free market entirely determine who succeeds and fails. For today, it'senough to point out that the tax advantages touched on in this article do helpalpaca breeders—especially those just getting started—but the tax breaks applyto all qualifying businesses, not just alpaca breeders.This article has touched on a few federal tax code provisions, and additionaltax benefits may be available to alpaca owners and breeders at the state,county and local levels. For example, many counties offer lower property taxrates for farms and ranches that qualify for agricultural status. Be sure tocheck with the taxing entities where you do business, as well as your taxadvisor, on whether your alpaca business qualifies for other taxconsiderations.
Sunday, February 6, 2022