ALPACAS AS AN INVESTMENT
By Nikki Griffith
People buy alpacas for many reasons. Some want to live the "alpaca lifestyle", and so buy several pet alpacas to grace their pastures (all while happily helping keep the pasture grasses under control); some are fiber artists who want a supply of their own home grown fiber; and some do it as a business and an investment. Those pet or fiber animals can typically be had for less than $100; however, the purchase of breeding stock is usually a larger investment.
There are many financial reasons to invest in alpacas over and above the “alpaca lifestyle”. Sandollar Alpacas offers frequent seminars to introduce the alpaca and its investment potential (check our Calendar of Events for the next seminar). In the interim, this article will attempt to explore those reasons.
Obviously, the biggest reason most people invest in alpacas is for the splendid return on investment that can be had. However, anyone contemplating the investment should be looking at long term, not short term gains.
There are a variety of income stream sources possible when raising alpacas.
•Sale of foundation stock to other new breeders; or pets to new owners
•Sale of raw fiber
•Creation of products from alpaca fiber and then re-sale at wholesale or retail level. Examples include roving, yarn, clothing, accessories, home accessories; the list can be endless
•Herdsire (stud) services
•Agistment (boarding) services for other owners
•Educational classes and seminars
•Shearing services for others
•Transportation services for others
Income & Expense Shelter
As with most business enterprise, all income must be reported from all sources, and all expenses attributable to raising alpacas can be written off against your income. This includes not only all the necessary feed and supplies, veterinary care, etc., but the depreciation of capital items as well, such as foundation herd, barns, fencing, irrigation, etc. All of these expenses can shelter current cash flow from taxes. So let’s take a look at some of the items that qualify.
First, the following items must be included in your gross income calculations:
· Income from alpaca sales (i.e., seed stock to other breeders, fiber animals, pet geldings, etc.)
· Breeding fees (owned or leased herdsire stud services)
· Income from raw fiber sales
· Income from “vertical integration”, i.e., taking the raw fiber and converting it into products that can be sold in your farm store
· Income from other sources, such as services you provide to other ranches including agistment, shearing, cria watch, etc.
Then the following expenses may be deducted from this income:
•Vehicle mileage at the current rate for all farm business miles
•Fees for the preparation of your income tax return farm schedule
•Livestock feed and supplies (grain, hay, supplements)
•Labor hired to run and maintain your farm
•Repairs and maintenance
•Taxes and insurance
•Rent and lease costs
•Depreciation on animals used for breeding, real property improvements, barns and equipment
•Farm-related travel and entertainment expenses
•Educational expenses, which improve your farming expertise
•Farm fuel and oil
•AOBA dues and registry fees
•Miscellaneous chemicals i.e. weed killer
•Small tools having a useful life of less then one year
If any items are part personal and part business, only the business portion may be deducted.
Many people ask whether they must actually have a farm and take care of the alpacas on a daily basis. It is possible to own alpacas, and agist them with someone who takes over their daily care. An agistment fee is typically paid, which again, is a deductible expense.
Deferred Wealth Building
This is one of the areas we like the most. Female alpacas are bred yearly, and the typical gestation period is around 11 months. The female is then bred back, and if all goes well, you get a new cria each year.
You have a 50/50 chance of female or male cria. If you have made good breeding decisions, breeding good foundation females to the best male herdsires you can afford, the new alpaca should be an improvement to your herd, and potentially increases the value of your herd over time. Herd growth in the U.S. is slow due to the fact that each female only has one cria per year (twins are rare). The demand for the fiber is high, thus assuring the breeder for continued opportunities for profits.
We began with three bred females, and gradually added new foundation females with highly sought after genetics. We have also added superior genetics in our herdsire acquisitions. Thus, the new alpacas born on our ranch are as valuable, arguably more valuable, than the alpacas we began with.
Most people don’t like paying taxes, although they would probably admit it is necessary in a free society to fund those things that government deems appropriate for the good of its people. Nonetheless, if we are honest, we don’t necessarily like it, and seek ways to minimize their payment. And I for one, am thankful for the tax benefits that owning alpacas can provide (over and above the “lifestyle” that we enjoy)! So there are a number of things to do before taking the plunge and buying your first alpacas.
· The first thing you should do is consult a knowledgeable tax professional to see how this investment might fit into your portfolio.
· The next important thing is to read the IRS Publication 225, Farmers Tax Guide, which is available at www.irs.gov/pub/irs-pdf/p225.pdf.
· Next, be sure to set up your operation on a “for profit” basis; hobby farms do not qualify for the deductions. (A farmer must make a profit in two of the last seven years to avoid this classification; however, even if you fail the profit test, you can still qualify if your intention is to be profitable.) Again, your tax professional can advise you in this area.
While the tax benefits were good when this industry began, it got much better on May 28, 2003 when Congress enacted the “Jobs and Growth Reconciliation Tax Act”. It has been amended several times, and the new rules provide several very powerful incentives for new alpaca breeders in the form of a “179 deduction”. Please refer to IRS Code Section 179 (d)(1) related to IRS code 1245(a)(3) assets.
The deduction limit was raised to $250,000 and is available through the end of 2010. It is expected to be extended through 2012 as well.
So let’s look at how these advantages might help you in your situation. Let’s make certain assumptions including you invest $10,000 to acquire your foundation herd and you are in the 45% tax bracket.
Computation of Taxs Savings
$10,000 Original Investment
45% Section 179 Deduction
(4,500) Tax Savings
$5,000 Actual Cost Out of Pocket After Tax of your Alpacas
Isn’t it nice how Uncle Sam helps fund the purchase of your alpacas?? If you do not have sufficient income to use the deduction in the year of purchase (earned income and self employment income), you can carry it forward to subsequent years.
The other alternative is to simply depreciate the cost of your foundation herd. This permits you to create a net operating loss which can be carried back two years (meaning you may actually get a refund of taxes previously paid, we did!).
· Charitable Deductions - Alpaca farmers are permitted to claim a charitable deduction for the value of an asset that is contributed to a charity.
· Exchanges - Alpacas qualify for “like kind exchanges” (Section 1031) and permits the owner to avoid taxes of a sale. For example, say that you purchase a herdsire, have used him for several years, and now his progeny are on the ground on your farm. You probably want to breed his progeny to someone new. Thus, you would be permitted to exchange your herdsire for another and avoid a taxable event.
· Installment Sales – Most breeders today finance the purchase of alpacas they sell over several years. Taxes are only due in the year that the income is received.
· Insurable – Alpacas are insurable and if one dies, a taxpayer is permitted to use the involuntary conversion rules in the code which permits tax-free replacement of the alpaca.
So are alpacas a good investment? You bet they are! Will they fit into your portfolio? Only you can answer that question after talking to knowledgeable breeders and your tax professional.
We here at Sandollar Alpacas are ready to discuss the benefits in more detail! Give us a call to schedule an appointment; you will be glad you did!
190605 E. 47th Avenue
Kennewick, WA 99337
Collins or Nikki Griffith
IRS Code Section 179 (d)(1) related to IRS code 1245(a)(3) assets.