Starting any business requires that you understand why. Why start a business? Why start THIS business? The alpaca business isn’t any different than others. Our decision to purchase alpaca was the result of many discussions (ie, brainstorming, talks, random thoughts) about ‘what if and why.’ We investigated as much as we thought possible by visiting many other alpaca owners, attending seminars and doing considerable reading. As a girl who grew up on an Iowa farm with both animals and crops, I wish I could say I was so smart that I found all of the answers. I didn’t. After all, I was that farm girl who didn’t understand the lifestyle and livestock we would come to appreciate.
Since Frank and I had more questions than answers, we decided we needed to learn what care (ie, handling, breeding, birthing, shearing) might entail. In retrospect when we reflect on the goals addressed in our 2014 business plan we can say we remain committed to the direction we planned. The path that got us here has taken routes we didn’t expect, but those invaluable learning opportunities have helped us become resources and make better decisions. During the initial discussions about starting this business, we identified (and you will always hear me quoting ourselves!) that alpaca are an “investment that keeps on giving.” Our focus was to invest in alpaca for the purpose of a continual income and in particular from their fleece production which is our annual crop, as well as the cria production we anticipate after a long 350 days! Although our main topic of the discussion wasn’t tax implications, as the business plan evolved, it was an important consideration we wanted to understand.
One of our first meetings (actually our first meeting!) was with our accountant so that we could explain our plan as we knew it. Little did we know how little we knew. He had advice for our decision because he was astute enough to know that this was not about ‘love at first sight’ (even though alpaca have the ability to steal your heart). First and foremost, he focused on recordkeeping. Sitting in that room, none of us had any idea how intricate our business would become, but he reiterated a basic need so that we could ensure our records reflected the decisions we would encounter. Any business requires detailed recordkeeping, and the livestock business is no different. Our advice to each prospective customer: Select a tax advisor who can accurately and effectively provide accounting for your alpaca business.
Aside from the lifestyle advantages (hard work and all !), there are tax benefits provided for both farms and small business. Section 179 (section179.org) is a resource for understanding the tax requirements.
- Deduction Limit – $25,000
- Limit on Capital Purchases – $200,000
An alpaca can typically be depreciated over a seven-year span. Capital gains can be available on the sale of breeding animals and their offspring and current expenses are deductible.
The first step in qualifying for favorable tax treatment as a farmer is establishing that you are in business to make a profit. You cannot 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. Factors considered when assessing your intent are that you:
- operate your farm in a business-like manner;
- spend time and effort doing farming activities to indicate intention to make it profitable;
- depend on income from farming for your livelihood;
- experience losses due to circumstances beyond your control or are normal in the start-up phase of farming;
- change methods of operation in an attempt to improve profitability; document the changes;
- make a profit from farming in some years and how much profit you make;
- demonstrate knowledge needed to carry on the farming activity as a successful business;
- made a profit in similar activities in the past;
- are not carrying on the farming for personal pleasure or recreation.
Qualifying does not require that each of these factors applies. Your approach to making the business profitable is the basis to determine if you are raising alpaca with intent to make a profit.
Once you’ve established that you are raising alpacas with that intent, you can deduct all qualifying expenses from your gross income as a cash basis taxpayer who keeps accurate records. Accrual basis tax payers would also be allowed the same tax treatment, but their timing might be different.
The following items must be included in your gross income calculations:
- Income from the sale of livestock
- Income from sale of the fiber crop
- Agriculture program payments
- Income from cooperatives
- Cancellation of debts
- Income from other sources, such as services
- Breeding fees
Once gross income is established, the following expenses that apply to the business may be deducted from this income:
- Vehicle expense
- Fees for the preparation of your income tax return farm schedule
- Livestock feed, hay, minerals
- Labor hired to run and maintain your farm
- Repairs and maintenance
- Breeding fees
- Fertilizer, chemicals
- Taxes and insurance
- Rent and lease costs
- Depreciation on animals used for breeding, real property improvements, barns and equipment
- Farm-related travel expenses
- Educational expenses, which improve your farming expertise
- Attorney fees
- Farm fuel and oil
- Farm publications
- Dues and registry fees
- Vet care
- Small tools having a useful life of less than one year
It is important to differentiate personal and business expenses. Only the ‘livestock’ (i.e., alpaca, farm) use portion can be expensed. Examples that can overlap might include expenses as utilities, property taxes or accounting.
A tax specialist will also consider at- risk rules, alpaca write-off, financing, capital improvements, capital gains vs. ordinary income, charitable deductions and exchanges and installment sales making them a valuable asset in the framework of the business.
We hear owners say they started the alpaca business for the tax ‘benefits’ There is no doubt that it is important to understand the rules and practices for the purposes of accurate accounting but this isn’t a business that can or should be built on taxes as a benefit. The laws that are in place to help small or start up business are important in considering your plans, but the growth and welfare of your business as a result of tax benefits should not be a deciding factor in starting an alpaca business.
Frank and I rely on our accountant. He knows our business without getting into our business decisions, but certainly is there when we need advice and direction. As with any business startup – you need to put a plan in place. Make a plan. Follow the plan and change the plan as you grow!