Tax Benefits of Owning Alpacas

If you think you might be interested in alpacas for pleasure or profit, you should consult with an accountant for advice on:

• Setting up your books; and
• Acquiring tax information (you can find the IRS publication, #225- The Farmer's Tax Guide at your local IRS office.

Hands-on alpaca farmers can take advantage of tax breaks described in the IRS publication #225. If alpacas are actively raised for profit, all the expenses associated with raising them can be written off against your income. Expenses include: feed, fertilizer, veterinarian care.  Property expenses can be depreciated- breeding livestock, barns, fences, farm equipment, etc. The costs associated with raising alpacas can help shelter cash flow from tax.

Owners that board their livestock and do not actively raise their own alpacas are able to benefit in many of the above tax savings but not all. For instance, the passive alpaca owner can depreciate breeding stock and expense the direct cost of maintaining the animals. The difference between a hands-on or active rancher and a passive owner is mostly that the passive owner's doesn’t have the ability to deduct losses against other income while the active owner can take the losses against income.

Qualifying for the most favorable tax treatment as an active owner means that you must establish that you are in business to make a profit and you are directly involved in your business. Your goal is to report a profit in three of the last five tax years, including the current year to be eligible for tax breaks.

If you should not be able to pass the three years of profit test, you may still be considered a "for-profit" farm if your intention is to be profitable. Some factors considered when addressing your intent include whether:

• You operate your ranch in a businesslike manner;
• You are not carrying on the ranching activity for personal pleasure or recreation; Your losses are normal in the start-up phase of farming or are beyond your control;
• The time and effort you spend on ranching indicates you intend to make it profitable; or
• You change your methods of operation in an attempt to improve profitability.

Be sure to seek the advice of your tax accountant and read the IRS publication #225 for more information about the tax rules.  You don't have to qualify on all points.

If you are a passive investor, you can take many tax benefits but may not be able to take them on a current basis, rather you will take the losses against profits or when you dispose of the herd:.

When an active alpaca rancher has determined his net income or loss, it is included on their tax return as an addition to or a deduction from their ordinary income. Losses can be carried back for three years and forward for 15 years. To deduct any loss, you must be at risk for an amount equal to or exceeding the losses claimed. The "at risk" rules mean that the deductible loss from an activity is limited to the amount you have at risk in the activity. You are generally at risk for:

• The amount of money you contribute to an activity
• The amount you borrow for use in the activity

The passive owner's losses that are in excess of current income can be carried forward and taken against future income-only the timing of losses is different not the deductibility.

To summarize, the tax advantages of alpaca ownership include the use of depreciation, capital gains treatment, and if you are an active hands-on owner, the benefit of off-setting your ordinary income from other sources with the expenses from your ranching business.