Taxes and Depreciation

By Kally Dennig, CPA

            Finding an alpaca friendly tax professional isn’t always easy.  You can start by checking with your friends, other breeders in your area, your AOBA affiliate, or AOBA.  A tax professional doesn’t necessarily need experience in the alpaca business, although, as in every other walk of life, experience is a plus.  However, at the very least they do need to have experience with farming issues and breeding livestock.

        You will be consulting with them on a regular basis so you need to feel comfortable with them and their ability to communicate.  The tax professional you choose should be able to provide you with details to tailor your entire tax return to your appropriate business type.  After all, it would sure be a shame to miss out on any tax advantages! 

        Speaking of tax advantages, I recommend that anyone in the alpaca business obtain a copy of IRS Publication 225 – Farmer’s Tax Guide.  You can get a copy from your local IRS office or at the IRS website at www.irs.gov.  In addition, if you are fortunate enough to have farm labor take a look at IRS Publication 51 (Circular A) – Agricultural Employer’s Tax Guide.

        CAVEAT:  “Only your tax professional knows what will work best for you.  Please consult with them, let them advise and guide you.” 

        Now let’s take a closer look at one of those tax advantages – Depreciation. 

        A major depreciation advantage is the Section 179 Expense Election.  This is an expense deduction provided for taxpayers who elect to treat the cost of qualifying property, called Section 179 property, as an expense rather than a capital expenditure.  This deduction is available every year when you purchase assets that are acquired for use in an active business.  For 2006 the Section 179 Expense Allowance is $108,000.  It comes with some limitations, one of which is the total cost of property that may be expensed for any tax year cannot exceed the total amount of taxable business income. 

        Capital expenditures for assets that are acquired for use in an active business that, for whatever reason, do not qualify for the Section 179 expense allowance can be depreciated over their useful lives. 

        Machinery and equipment, grain bins, and fences used in agriculture are classified as 7-year property.  Farm buildings other than single purpose agricultural or horticultural structures are 20-year property.  Single purpose agricultural or horticultural structures placed in service after 1988 are 10-year property.  A machine shed would fall into this category.  Land improvements (other than machinery and equipment, grain bins, and fences) are 15-year property.

        Alternative livestock.  Miniature donkeys, miniature horses, llamas (including vicuna, guanaco, alpaca), deer, elk, reindeer, bison, miniature pigs, sport sheep, lemurs, big cats, wallabies, wallaroos, monkeys, parrots, alligators, and munchkin cats.  If depreciable, these animals are 7-year property (12-year ADS period).  Animals purchased for resale are not depreciable.  Breeding animals are depreciable and qualify for the Section 179 expense allowance in the year that they are placed in service for breeding purposes.

        Discuss the advantages of the Section 179 Expense Election with your tax professional today and let Uncle Sam pay for your alpacas tomorrow!

        *Kally Dennig is a CPA and an alpaca breeder in Louisiana. She owns Cushy Alpacas, and is the Treasurer for the Deep South Alpaca Connection (DSAC), AOBA affiliate serving LA, MS, and AL. Visit her on the web at www.alpacanation.com/cushyalpacas.asp