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by Mark Puhr
February 2002
Homestead Alpacas
The alpaca owner, that has invested in the animals for business reasons, will find that there are many tax advantages in raising these animals. This article is about my experiences with operating my farming business and how I prepare my income tax forms. If you've owned and operated other businesses before, you will not have many problems understanding the concepts. The primary difference will be in the type of assets and the depreciation schedule. The AOBA web site also has good information on the tax consequences of investing in these animals.
I recommend that you engage an accountant for advice in setting up your books and determining the proper use of the concepts discussed in my article. A very helpful IRS publication, #225, entitled The Farmers Tax Guide, can be obtained from your local IRS office. The aim of this discussion of IRS rules is to make you more conversant in the issues of taxation as they relate to raising alpacas.
You will also want to obtain the investment brochure "Financial aspects of Alpaca ownership", which covers the different business strategies. Contact me for a copy or visit the AOBA web site to request a copy.
Like any venture, you must have a clear plan and organization to support the plan. Read my 10 step business plan if you do not already have a business plan. I have a monthly log book where I track my revenues and expenses. I also categorize the expenses per Schedule F expense categories.
Car and Truck Expenses - this is mileage in operating the farm, include trips to events, feed store, other farms, organization activities, etc.
Feed Purchased - hay and grain
Gasoline, Fuel and Oil - I have a tractor and other various equipment that needs fuel
Insurance - animal insurance
Repairs and Maintenance - includes repairs to the assets, and other maintenance required
Seeds and Plants Purchased - grass seed, trees for shade or protection
Supplies Purchased - this can be a catch-all bucket, but with proper identification of other expense can be just bolts, nails, etc.
Veterinary, Breeding, and Medicine - Vet costs and associated medications, include stud fee you paid
Other Expenses - this would include accountant consultation or accounting fees for taxes
Depreciation - These are the assets. I classify an asset as any item with more than a year's life and that costs more than $250 dollars
Maintain the log book for all you expenses and revenues. If you don't generate your own form, then visit Office Depot to get a standard business log book.
Keep a journal of all your activities, such as farm visits, veterinary calls and what the veterinarian performed on the animals. Every farming activities should be documented in this journal, use it for your own reference as well as audit reference.
This will be the most difficult area to understand, consult with an accountant. My assets are classified as such:
Animals - 5 year 150% Declining Balance (150%DP). You may opt to use Section 179 and depreciate the whole asset or just part with Section 179 and the rest 150%DP. The first year you can only do 6-month depreciation unless you elect Section 179, then if an animal was purchased in December, you can depreciate the whole amount for that year.
Buildings - permanent buildings such as barns are 150%DP for 20 years. Loafing sheds or portable buildings are 150%DP over 7 years.
Livestock trailer - 5 year 150%DP
Vehicles such as trucks - I don't depreciate my vehicles, I use the car and truck expense worksheet and simply deduct the mileage. At 34.5 cents per mile with no recovery income, this is much better from a deduction standpoint.
Fencing - 7 year 150%DP
Consult with an accountant or visit an alpaca event where there are seminars on tax consequences of raising alpacas.
I purchased Intuit's Quickens TurboTax for Home and Business to do my taxes, but I'm sure any tax preparation software will work just fine. Complete all the necessary interview fields. You can also go directly to the various forms or jump back and forth between the two processes of gathering information. Once completed, I would strongly suggest reviewing the completed forms with an accountant.
With the tax software, you can run different scenarios such as should I take a Section 179 or use the 5 year 150%DP on animals. This is great software to do "what if" scenarios.
The business taxes are not that hard if you have the software to help complete the forms and you use an accountant to verify entries. You will have a thorough understanding of you business financial matters if you prepare you own taxes. You can then make informed decisions later on as to how the sale or purchase will impact you from tax situation.
Last update: March 14, 2002
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Homestead Alpacas, 7880 W 20th St,
Greeley, CO 80634, (970) 506-0799,