Alpaca Info Library
is an Alpaca?
Alpaca (Vicugna pacos) is a
domesticated species of South American camelid
developed from the wild alpacas. It resembles a sheep in
appearance, but is larger and has a long erect neck as
well as coming in many colors, whereas sheep are
generally bred to be white.
are kept in herds that graze on the level heights of the
Andes of Ecuador, southern Peru, northern Bolivia, and
northern Chile at an altitude of 3500 to 5000 meters
above sea-level, throughout the year. Alpacas are
considerably smaller than llamas,
and unlike them are not used as beasts of burden but are
valued only for their fiber.
Alpacas only have fleece fibers, not woolen fibers, used
for making knitted and woven items much as sheep's wool
is. These items include: blankets, sweaters, hats,
gloves, scarves, a wide variety of textiles and ponchos
in South America, and sweaters, socks and coats in other
parts of the world. The fiber comes in more than 52
natural colors as classified in Peru, 12 as classified
in Australia and 22 as classified in America. Alpacas
and llamas differ in that llamas have banana shaped ears
and long tails and alpacas have straight ears and stubby
tails. Aside from these differences, llamas in general
are on average 1-2 feet taller, and bigger in proportion
the textile industry, "alpaca" primarily
refers to the hair of Peruvian alpaca, but more broadly
it refers to a style of fabric originally made from
alpaca hair but now often made from similar fibers, such
as mohair, Icelandic sheep wool, or even high-quality
English wool. In trade, distinctions are made between
alpacas and the several styles of mohair and luster.
Alpaca Tax Planning
Alpaca Taxes 2015:
Why Not Have Uncle Sam Help You Buy Your Alpacas
considering entering the alpaca industry should engage an
accountant for advice in setting up your books and determining
the proper use of the concepts discussed in this brochure. A
very helpful IRS publication, #225, entitled The Farmer’s
Tax Guide, can be obtained from your local IRS office. The
goal of this discussion of IRS rules is to provide the
guidelines for discussion with your accountants and financial
advisors so that you can be more conversant in the issues of
taxation as they relate to raising alpacas.
alpacas at your own ranch, in the hands-on fashion, can offer
the rancher some very attractive tax advantages. If alpacas
are actively raised for profit, all the expenses attributable
to the endeavor can be written off against your income.
Expenses would 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.
less active owner using the agisted ownership approach may not
enjoy all of the tax benefits discussed here but many of the
advantages apply. For instance, the passive alpaca owner can
depreciate breeding stock and expense the direct cost of
maintaining the animals. The main difference between a
hands-on or active rancher and a passive owner involves the
passive owner’s ability to deduct losses against other
income. The passive investor may only be able to deduct losses
from investment against gain from the sale of animals and
fleece. The active rancher can take the losses against other
breeding allows for tax-deferred wealth building. An owner can
purchase several alpacas and then allow the herd to grow over
time without paying income tax on its increased size and value
until he or she decides to sell an animal or sell the entire
qualify for the most favorable tax treatment as a rancher, you
must establish that you are in business to make a profit and
you are actively involved in your business. You cannot raise
alpacas as a hobby rancher or passive investor and receive the
same tax benefits as an active, hands-on, for-profit rancher.
A ranching operation is presumed to be for-profit if it has
reported a profit in three of the last five tax years,
including the current year. If you fail the three 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:
operate your ranch in a businesslike manner.
time and effort you spend on ranching indicates you intend
to make it profitable.
depend on income from ranching for your livelihood.
losses are due to circumstances beyond your control or are
normal in the start-up phase of ranching.
change your methods of operation in an attempt to improve
make a profit from ranching in some years and how much
profit you make.
or your advisors have the knowledge needed to carry on the
ranching activity as a successful business.
made a profit in similar activities in the past.
are not carrying on the ranching activity for personal
pleasure or recreation.
don’t have to qualify on each of these factors – the
cumulative picture drawn by your answers will provide the
you’ve established that you are ranching alpacas with the
intent to make a profit, you can deduct all qualifying
expenses from your gross income.
you are a passive investor, you are still allowed the tax
benefits discussed below. The issue is whether you will be
able to take the losses on a current basis. All the losses can
be taken against profits or upon final disposition of the
herd. The discussion from here forward presumes you are a cash
basis taxpayer and you keep good records. Accrual basis
taxpayers would also be allowed the same tax treatment, but
their timing might be different.
the following items must be included in both a passive
owner’s and a full time rancher’s gross income
from the sale of livestock
from sale of crops, i.e. fiber
from other sources, such as services
following expenses may be deducted from this income. Please
note, if you are agisting your animals, not all of these
deductions may apply on a current basis:
mileage for all ranch business (IRS publishes current
for the preparation of your income tax return ranch
hired to run and maintain your ranch
repairs and maintenance
and lease costs
on animals used for breeding
of real property improvements, such as barns and equipment
or investment-related travel expenses
expenses, which improve your ranching or investment
fuel and oil
(breed association) dues
chemicals, i.e. weed killer
note: For hands-on ranchers, personal and business expenses
must be allocated between ranch use and personal use. Only the
ranch use portion can be expensed for such expenses as a
telephone, utilities, property taxes, accounting, etc.
active alpaca ranchers have determined their 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:
amount of money you contribute to an activity
amount you borrow for use in the activity
passive owner’s losses that are in excess of current income
can be carried forward and taken against future income. In
other words, the passive owner does not lose the deductibility
of expenses, but the timing of the losses may be different.
All taxpayers must establish the cost basis of their assets
for tax purposes. This cost basis is used to determine the
gain or loss on sale of an asset and to figure depreciation.
In determining basis, you must follow the uniform
capitalization rules found in the IRS code. Animals raised for
sale are generally exempt from the uniform capitalization
rules, and there are other exceptions for certain ranch
property. You need to become familiar with these rules.
you’ve established the cost basis of your various assets,
you take a deduction for depreciation against your annual
income. This process allows you to expense the historic cost
of an asset to offset present income. The effect is to create
non-taxable cash flow on a current basis. This benefit is
especially attractive in an environment of higher taxes.
in which you have cost basis can be written off over five,
seven, or ten years, if they are being held as breeding stock.
There are several methods of writing them off, beginning with
the straight-line method, which allows you to deduct one-fifth
of their cost each year, except the first year, in which the
code allows for only six months of write-off. There are also
several accelerated schedules that allow for a larger
percentage of the asset to be written off early. Alpaca babies
produced by your females have no cost basis and cannot be
written off, although they may qualify for capital gain
treatment on sale.
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. 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.
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. While this is subject to several limitations, it is
widely utilized by small ranches to accelerate expense, if
that is appropriate for your tax situation. Owners currently
in high tax brackets, who are changing their lifestyle in the
next several years to a lower income level, often use it.
original cost basis of an asset is reduced by the annual
amount of depreciation taken against the asset. Other costs
add to the cost basis, such as certain improvements or fees on
sale. The changes to basis result in the adjusted cost basis
of the asset. Upon sale, excess depreciation previously
expensed must be recaptured at ordinary income rates. The
recapture rules are a bit complex, as are most IRS rules, but
the IRS Farmer’s Publication mentioned earlier explains them
an asset is sold, for instance a female alpaca that was
purchased for breeding purposes and held for several years,
the gain or loss must be determined for tax purposes. If an
alpaca was purchased for $20,000, depreciated for two and a
half years, or say 50% of its value, and then resold for
$20,000, there would be a gain for tax purposes of $10,000. In
other words, your adjusted cost basis is deducted from your
sale price to determine gain or loss.
you’ve determined the amount of a gain, you must classify it
as either ordinary income or capital gain. The sale of
breeding stock qualifies for capital gains treatment
(excepting that portion of the gain which is subject to
depreciation recapture rules). Any alpacas held for resale,
such as newborn crias that you do not intend to use in your
breeding program, would be classified as inventory and produce
ordinary income on sale.
discussion of tax issues omits a number of rules that could
impact your taxes. Tax preference items, alternate minimum
taxes, employment taxes, installment sales, additional
depreciation, and other concepts of importance were not
discussed. Whether we like it or not, this is a complicated
world we live in. It often requires the assistance of
professional accounting and legal assistance.
summary, 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 the expenses from
your ranching business. Wealth building by deferring taxes on
the increased value of your herd is also a big plus. It pays
to keep your eye on the tax law changes instituted by Congress