Tax Benefits of Owning Alpacas
Those considering entering the alpaca industry should engage
an accountant for advice in setting up your books and determining
the proper use of the concepts discusses in this section of our
web site. 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.
Raising 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, veterinary care, and so forth,
but also the depreciation of such tangible property as breeding
stock, barns, and fences. These expenses can also help shelter
income from tax.
The less active owner using the agisted/livery 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 income.
Alpaca 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
To 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
If you fail the three years of profit test, you may still qualify
as a "for-profit" enterprise if your intention is to
Some of the factors considered when assessing your intent are:
You operate your ranch in a businesslike manner.
The time and effort you spend on ranching indicates you intend
to make it profitable.
You depend on income from ranching for your livelihood.
Your losses are due to circumstances beyond your control or
are normal in the start-up phase of ranching.
You change your methods of operation in an attempt to improve
You make a profit from ranching in some years and how much profit
You or your advisors have the knowledge needed to carry on the
ranching activity as a successful business.
You made a profit in similar activities in the past.
You are not carrying on the ranching activity for personal pleasure
You don't have to qualify on each of these factors - the cumulative
picture drawn by your answers will provide the determination.
Once 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.
If 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
First, the following items must be included in both a passive
owner's and a full time rancher's gross income calculation:
- Income from the sale of livestock
- Income from sale of crops, with alpacas this is the sale
- Agriculture program payments
- Income from cooperatives
- Cancellation of debts
- Income from other sources, such as services
- Breeding fees
The following expenses may be deducted from this income. Please
note, if you agist/livery your animals, not all of these deductions
may apply on a current basis:
- Vehicle mileage for all ranch business (IRS publishes current
- Fees for the preparation of your income tax return ranch
- Livestock feed
- Labor hired to run and maintain your ranch
- Ranch repairs and maintenance
- Breeding fees
- Taxes and insurance
- Rent and lease costs
- Depreciation on animals used for breeding
- Depreciation of real property improvements such as barns
- Ranch or investment-related travel expenses
- Educational expenses, which improve your ranching or investment
- Attorney fees
- Ranch fuel and oil
- Ranch publications
- AOBA (breed association) dues
- Miscellaneous chemicals, such as weed killer
- Veterinarian care
- Small tools (with a life of less than one year)
- Agistment/livery fees
Please 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.
Once 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:
- The amount of money you contribute to an activity
- The amount you borrow for use in the activity
The 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 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
Once 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.
Alpacas 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 cast basis and cannot be written off,
although they may qualify for capital gain treatment on sale.
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.
Equipment such as tractors, pickups, trailer, 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.
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.
The original cost basis of an asset is reduced by the annual
amount of depreciation taken against the asset. Other costs add
to 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 well.
When 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 percent 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.
Once 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.
This 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
In 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 off-setting
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.
Helpful Tax Links
Tax Guide for Farmers 2004:
112 pages of tax advice including what is new for 2004 and 2005.
Tax Guide for Depreciation of Property:
111 pages of advice from the IRS on how to depreciate property.