TAX DEFERRED WEALTH BUILDING
Alpaca breeding also allows for wealth building, while deferring tax on your investment's increased value. A small farmer can purchase several alpacas and then allow their herd to grow over time without paying tax on its increased size and value. If the same amount of money was invested in a Certificate of Deposit, any interest earned would be currently taxable. In addition, the C.D. could not be depreciated, thereby offsetting the amount of tax due.
IRS CODE SECTION 179 DEDUCTION
This deduction is available every year when you purchase IRS code 1245(a) (3) assets that are acquired for use in an active business [(Code Section 179 (d) (1)], assuming that you have not used the deduction on a computer or some other qualifying asset. Many people do not understand that you can use this deduction to write off your purchase of up to $250,000 worth of alpacas this year and that they can take another $250,000 deduction next year for additional qualifying assets. The following example takes into consideration IRS code section 179.
Purchase price (one or more alpacas): $250,000
Section 179 tax deduction ($250,000)
Tax savings 45% (tax bracket 45%) ($112,500)
Actual after tax cost out of pocket $137,500
In other words, if you are in the 45% tax bracket (state & federal) the government will reduce your taxes by 45% of the cost of $250,000 worth of alpacas. This deduction is available for all taxpayers with an active business. To see how much this will benefit you, simple calculate your state and federal tax bracket and multiply it by the amount of your purchase up to $250,000.
- You must have sufficient income to use the deduction. The income must be earned income to utilize the deduction. (Earned income includes wages & self employment income, but Social Security and pension income unfortunately do not qualify).
- The unused portion of the deduction can be carried forward to subsequent years.
- You may want to forgo electing to take the deduction and simply depreciate the cost of your alpacas. This approach would allow you to create a net operating loss which could be carried back two years and you may obtain a refund of previously paid tax, and
- To benefit from the 179 deduction the tax payer can not place more than $800,000 of qualifying assets in service in the year that the deduction is taken.
AN ADDITIONAL 50% FIRST YEAR DEPRECIATION
There are even more important changes for alpaca breeders. In an effort to stimulate the economy, Congress is giving taxpayers a bonus 50% first-year depreciation write-off for most new capital assets, including single purpose agricultural buildings placed in service before December 31, 2008. (Please note that agricultural buildings as defined below also qualify for the Section 179 deduction.
"Single purpose agricultural (livestock) or horticultural structures. A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 deduction. For purposes of determining whether a structure is a single purpose agricultural structure, poultry is considered livestock.
Agricultural Structure. A single purpose agricultural (livestock) structure is any building or enclosure designed, constructed, and used for both the following purposes: 1) To house, raise, and feed a particular type of livestock and its produce. 2) To house the equipment, including any replacements, needed to house, raise or feed livestock."
Section 179 Deduction
IRS Publication for farmers, Chapter 8, Depreciation, Depletion, and Amortization.
In effect, this additional write-off means that you can recover more of the cost of a business asset, such as an alpaca or a barn, in the year you place it in service.
HOBBY FARM RULES
The first step in qualifying for favorable tax treatment as a farmer is establishing that you are in business to make a profit. You can not raise alpacas as a hobby farmer and receive the same tax preferences as a for-profit farmer. A farming operation is presumed to be for profit if it has reported a profit in two of the last seven tax years, including the current year.
If you fail the two years of profit test, you may still qualify as a "for profit" enterprise if your intention is to be profitable. Some of the factors considered when assessing your intent are:
- If you operate your farm in a business-like manner.
- The time and effort you spend on farming indicates you intend to make it profitable.
- You depend on income from farming for your livelihood.
- Your losses are due to circumstances beyond your control or are normal in the start-up phase of farming.
- You change your methods of operation in an attempt to improve profitability.
- That you make a profit from farming in some years and how much profit you make.
- You or your advisors have the knowledge needed to carry on the farming activity as a successful business.
- You made a profit in similar activities in the past.
- You are not carrying on the farming for personal pleasure or recreation.
- You don’t have to qualify on each of these factors - the cumulative picture drawn by your answers will provide the basis for the determination.