UNIVERSITY PARK, Pa. – The newest trend in tax shelters has four legs and the social quirk of spitting – mostly at one another and rarely at humans.
Tax advantages found by breeding alpacas are contributing to the rise in their ownership in the United States.
Tax advantages. “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,” explains Ed Friedman, an adjunct faculty member who teaches entrepreneurship courses at Penn State.
“Wealth building by deferring taxes on the increased value of your herd is also a big plus.”
If alpacas are actively raised for profit, all the expenses attributable to the endeavor can be written off against income.
Possible deductions. Expenses include feed, fertilizer, veterinarian care, etc., but also the depreciation of such tangible property as breeding stock, barns and fences. These expenses can also help shelter current cash flow from tax, notes Friedman.
Alpaca breeding allows for tax-deferred wealth building. A small owner can purchase several alpacas and then allow his herd to grow over time without paying income tax on its increased size and value, said Friedman.
Friedman, who co-owns Mountain Edge Alpacas in Boalsburg, Pa., reports that the tax benefits is one of the primary reasons buyers invest in alpacas.
Alpacas in which owners have cost basis can be written off over five years if they are being held as breeding stock. There are several methods of writing them off.
Capital improvements to the active or hands-on alpaca breeder’s ranch can also be written off against income. Barns, fences, pond construction, driveways, and parking lots can be expensed over their useful life.
More write-offs. Equipment such as tractors, pickups, trailers and scales each have an appropriate schedule for write-off. The depreciation schedule for each asset class varies from three years to 40 years.
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, notes Friedman.
While this is subject to several limitations, it is widely utilized by small farms to accelerate expense.
About alpacas. There are today about 3 million alpacas in South America, most of them in Peru, and small but growing herds in the United States, Australia, New Zealand, Canada, the United Kingdom and Europe.
According to Alpaca Registry International, about 2,800 breeders in the United States own some 28,000 alpacas.
The long-term market is the alpaca fiber itself, said to be more resilient, stronger and warmer than merino wool. Alpaca fiber – unlike sheep wool – is grease-free and goes for 10 times the price of wool.
A pair of pet quality males, which can be used for companion animals and for fiber only, will sell for about $600 to $800 each.