To begin, I want you to know that the idea of taxes is not new nor the exclusive sin of the United States Government. In Roman times, Caesar Augustus decreed, "that all the world should be taxed." Politicians have taken taxation to heart for centuries. We have, on occasion, been given good advice about our responsibility to pay tax. The Honorable Judge Learned Hand of the 2nd Circuit Court of Appeals instructed the IRS, in a high court decision, that it was not a citizen's duty to conduct himself so as to pay the maximum tax possible, but that a common man might arrange his affairs so as to pay the least amount of tax possible. God bless the judge, and God bless our alpacas and their tax advantages.
I must confess, I don't like to pay taxes; I always do, but I'm never happy about it. I inherited this bias, I believe, from my father. Dad was always fully convinced of his beliefs, and he believed that IRS agents were the bad guys.
Dad was one of the first full time llama farmers in the U.S. to be audited by the IRS. It was quite a task to prove to the agent who conducted Dad's audit that llamas were in fact a profit making enterprise. The agent decided that before he completed his review of Dad's tax return, he wanted to see these llamas with his own eyes; just to make sure, of course, that everything was on the up and up.
After much negotiating between my dad's accountant and the agent, it was agreed that the agent could view the llamas from the road in front of Dad's farm; he wasn't to be allowed on the property. When the fateful day arrived, Sam, the IRS agent, appeared at the fence in front of Dad's ranch. It wasn't long before Bonnie, his big black llama, wandered up to the fence and offered Sam a kiss. I still to this day believe that my dad's audit was the only one ever closed as a result of a llama's kiss. Thank God, she didn't spit!
Raising alpacas can offer the farmer some very attractive tax advantages. In 2003 those benefits got a lot better due to the "Jobs and Growth Reconciliation Tax Act." which was enacted into law on May 28, 2003. It was amended for the 2009 tax year. The new rules added several powerful incentives for people who buy alpacas. The 179 deduction has been raised to $250,000, and it is available thru 2009. In addition, there is a special bonus depreciation available in 2009. For farms making large capital investments in 2009, this offers a huge benefit.
If alpacas are raised for profit, all the expenses attributable to the endeavor can be written off against your income. Expenses would include not only feed, fertilizer, veterinarian care, etc., but depreciation of such tangible property as breeding stock, barns and fences, all of which can help shelter current cash flow from tax. Beyond these basics there are several strategic tax advantages for the alpaca farmer.
The fact is that Uncle Sam will pay for a portion of the cost of acquiring your herd, assuming you are currently paying income tax and plan to continue paying income tax over the next six years. You can write 100% of your original purchase price off, up to a maximum of $250,000, in the year of purchase. If you are in the 45% tax bracket, the deductions for depreciation that the animals are eligible for may save you up to 45% in cash, of your original purchase price.
If you were to buy 15 females for $250,000, pay $75,000 down, and take advantage of IRS code section 179, insure the animals and finance the balance over 4 years, the government would give you a tax refund of $121,408 and you would have cash out of pocket of only $8,711 in the first year.This assumes you are in a 45% tax bracket (state & federal). The total after tax cost of your $250,000 investment is $180,850 over the 6-year asset life the IRS allows.
As you can see, Uncle Sam really does help you buy alpacas. In this case, he provides you tax breaks to the tune of $69,150. What is really nice is the lion's share of the tax savings occurs in the first year. New alpaca farmers usually have the greatest need in the first year when building barns and fences. The tax savings due to accelerated depreciation are very helpful during farm start-up. If you are investing more than $250,000, the special bonus depreciation provides even greater benefits. See Page 6 for a more complete example.
I recommend that you engage an accountant for advice in setting up your books and determining the proper use of the concepts discussed in this article. The aim of this discussion of IRS rules is to make you more conversant with the issues of taxation.