Why do people worldwide call alpacas the world's finest livestock investment? For any investment to be valuable, it must possess qualities that make it desirable. Precious gems and metals are scarce, real estate provides shelter and natural resources, oil provides energy, bonds earn interest, and stocks are supposed to grow and increase in value. Alpaca investment shares many of these investment attributes. Alpacas are in strong demand worldwide, and people pay high prices for them. They are scarce, unique, and the textiles produced from their fiber are known in the fashion centers of Paris, Milan, and Tokyo. In 2006 in the USA, there were only 100,000 registered alpacas as compared to the 5 million alpacas in South America. There are excellent profit opportunities and tax advantages available to alpaca breeders. Historically, the alpaca's value has sustained ancient cultures, such as the Incas of Peru, and today alpacas are the sustaining economic force for millions of South Americans.

There are two ways of investing in alpacas. The active, or hands-on method, where you actively raise your animals yourself for profit, and the passive, or agisted method, where you invest in the animals which are boarding on someone else's ranch.

As a breeder, you can depreciate a male or female alpaca used for breeding purposes over a five-year period. Breeding animals are considered a capitol asset. Furthermore, the first year that the capitol asset is acquired, there is a maximum of $18,500, which can be used as a business expense item. Income derived from the sale of capitol assets is usually taxed at a lower rate than that of income derived from other sources, such as regular earnings. Any expenses, which you incur, such as veterinary care, feed bills, or any other costs associated with the raising of your alpacas, are deductible. As an active breeder there is also the ability to depreciate tangible property, such as barns and fences, as well as breeding stock to be considered.

Offset Taxable Income. Your alpaca farm may generate taxable losses that may be used to offset taxable income from other sources. Alpaca breeding is an excellent way to accomplish tax-deferred wealth building. The small farmer or investor can purchase several alpacas and allow the herd to grow without paying income taxes on the increased value of that herd.

Agisting Benefits. If you agist your alpacas, your tax advantages will vary from that of an active owner, but they will still be very attractive. The main difference is that all of your expenses incurred in the raising of the alpacas can used as deductions against your profit, until such time as you sell the alpacas.

This is only a short, and by no means complete, summary of the tax advantages available to you as an alpaca breeder. The IRS publication #225, The Farmers Tax Guide, is very helpful. We strongly recommend that you consult an accountant or tax advisor, who is familiar with breeding livestock and farming issues.

You may want to agist, or board, your alpacas with an established alpaca owner for a while. The fees are reasonable, usually only a few dollars per day and, of course, this would be a tax deductible expense. This will also give you the option of purchasing one alpaca at a time. Alpacas are herd animals and need to live with other alpacas, as they can actually become very stressed if separated. That is why we strongly suggest the purchase of at least two if you are going to take them home to raise yourself.

Many spinners and weavers will purchase a neutered male alpaca, so as to have an available source of the world's finest fiber. Some people may want to purchase one or two animals as a way to accumulate the funds required for the college education of their children. The purchase of just two breeding females is a good start toward that end. Given a ten year period, those two original females can very conservatively grow into a herd of thirty or more alpacas! Of course, you may want to purchase a male to use as a herd sire, or you can take advantage of the many herd sire animals available for a stud fee. Again, if you don’t wish to take on the task of breeding your own animals agistment would be an excellent option for you.

The purchase of alpacas for investment is always a personal decision, and you should investigate fully the many options open to you. There is always a risk involved in the purchase of any kind of livestock, and alpacas are no exception.

They are however, extremely hardy and easy-to-raise, and they are 100% insurable for mortality and theft. Actually, we don’t know of a better animal to invest your money or your love in!

Is it profitable to raise and market alpacas? That is often the bottom line question. It is said that "Alpacas are the world’s finest livestock investment" for a very good reason. The worldwide demand for alpacas and their fiber has been strong and has continued to increase yearly. The demand for the animals exceeds the supply. They produce only one cria a year, so the population of alpacas increases slowly. Importation from South America is limited by difficulty of regulations and quarantine, cost, and the strict guidelines imposed by the Alpaca Registry. A situation where demand is high, coupled with a restricted supply creates a market for alpacas where prices are stable. It is commonplace for the female offspring of an alpaca to sell for the same price as the investor paid for the dam. Male offspring, if they are of herdsire quality, can bring several thousands of dollars more than the dam. The alpaca business is not a get-rich-quick business. It takes work and dedication just like any other business, but yes there is profit to be made in this wonderful business. By the way, can you think of another business where your investment can be one hundred percent insured?

Stable Prices. Will alpaca prices stay at their current levels? It is expected that prices will be stable for many more years. We in the industry are working to improve our textile market. As the demand for more fiber increases, the demand for more alpacas will also increase. We are confident that the alpaca industry will remain healthy and viable.

Is the financial gain the only reason that people invest in alpacas? Typically, people invest in alpacas for two reasons. One is the financial investment, and the other is for the lifestyle investment. There is not another business that we know of that can offer such a good return on your investment while affording a lifestyle that is so satisfying to the soul. Raising alpacas is not just the investment of a lifetime, it’s an investment in a lifestyle in which your whole family can participate.

Is it for everyone? No it isn’t for everyone, but if you think it is something that you would enjoy, if you love the animals and want to be part of one of the most dynamic businesses in the world, but still be able to keep in touch with the basics of life, then it could be for you.

Alpaca breeding also allows for wealth building, while deferring tax on your investment's increased value. A small farmer can purchase several alpacas, and then allow their herd to grow over time without paying tax on its increased size and value. If the same amount of money was invested in a Certificate of Deposit, any interest earned would be currently taxable. In addition, the C.D. could not be depreciated, thereby offsetting the amount of tax due.

This deduction is available every year when you purchase certain assets, assuming that you have not used the deduction on a computer or some other qualifying asset. Many people do not understand that you can use this deduction to write off your purchase of up to $24,000 worth of alpacas annually. This following example takes into consideration IRS code section 179.

If you are in the 50% tax bracket, the government will reduce your taxes by 50% of the cost of $24,000 worth of alpacas each year. This deduction is available for all taxpayers. To see how much this will benefit you, calculate your tax bracket and multiply it by the amount of your purchase up to $24,000. The amount of this deduction is scheduled to go higher in future years.

There are important changes for alpaca breeders in the recently-enacted Job Creation and Worker Assistance Act of 2002. In an effort to stimulate the economy, Congress is giving taxpayers an extra 30% first-year depreciation write-off for most new capital assets (other than buildings) acquired after September 10, 2001, and before September 11, 2004, and placed in service before 2005. In effect, this additional write-off means that you can recover more of the cost of a business asset, such as an alpaca, in the year you place it in service.

The first step in qualifying for favorable tax treatment as a farmer is establishing that you are in business to make a profit. You can not 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 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:

• You operate your farm in a business-like manner.
• The time and effort you spend on farming indicates you intend to make it profitable.
• You depend on income from farming for your livelihood.
• Your losses are due to circumstances beyond your control or are normal in the start-up phase of farming.
• You change your methods of operation in an attempt to improve profitability.
• That you make a profit from farming in some years and how much profit you make.
• You or your advisors have the knowledge needed to carry on the farming activity as a successful business.
• You made a profit in similar activities in the past.
• You are not carrying on the farming for personal pleasure or recreation.
• You don’t have to qualify on each of these factors – the cumulative picture drawn by your answers will provide the basis for the determination.

One of the frustrating factors in dealing with the IRS rules is getting to a definitive answer. The code is often more grey than black or white; consider the following statement which is found in IRS publication 255, Farmers Tax Guide: “This publication covers some subjects on which a court may have made a decision more favorable to taxpayers than the interpretation of the Service. Until these differing interpretations are resolved by higher court decisions or in some other way, this publication will continue to present the interpretation of the Service.”

It is recommended that everyone who farms alpacas obtain a copy of this handy guide at your local IRS office or at the IRS website at http://www.irs.gov/. It is very informative.

First, the following items must be included in your gross income calculations:

• Income from the sale of livestock
• Income from sale of crops, i.e., fiber
• Rents
• Agriculture program payments
• Income from cooperatives
• Cancellation of debts
• Income from other sources, such as services
• Breeding fees

Then the following expenses may be deducted from this income:

• Vehicle mileage at 34.5 cents a mile for all farm business miles
• Fees for the preparation of your income tax return farm schedule
• Livestock feed
• Labor hired to run and maintain your farm (remember, you must not deduct the expense of maintaining your personal residence)
• Repairs and maintenance
• Interest
• Breeding fees
• Fertilizer
• Taxes and insurance
• Rent and lease costs
• Depreciation on animals used for breeding, real property improvements such as barns and equipment
• Farm-related travel expenses
• Educational expenses, which improve your farming expertise
• Advertising
• Attorney fees
• Farm fuel and oil
• Farm publications
• AOBA/ARI/AFCNA dues and registry fees
• Miscellaneous chemicals, e.g. weed killer
• Vet care
• Small tools having a useful life of less then one year

Note: Personal and business expenses must be allocated between farm use and personal use, for instance, with such expenses as utilities, property taxes, accounting, etc. Only the farm use portion can be expensed.

Once you've determined your net income or loss, it is included on your tax return as an addition to or a deduction from your ordinary income. Losses can be carried back for two years and forward for twenty 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

You must establish the cost basis of your 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 farm property. You need to become familiar with these rules.

Once you've established the cost basis of your various assets, you take a charge 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.

There are several methods of writing off alpacas, 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 a prorated write off based on the month of your purchase. The net result of this method is that it takes six years to write off your alpacas, unless you buy them in January. The straight line system can only be used by making an election. There is also the modified accelerated cost recovery system using 150% declining balance and the half-year convention (MACRS) which allows animals to be written off as follows: 15% year 1, 25.5% year 2, 17.85% year 3, 16.66% years 4 and 5, and 8.33% year 6. This is an accelerated schedule allowing for a larger percentage of the asset to be written off early. The MACRS system is the system preferred by the IRS since it does not require an election. Alpacas born at your ranch have no cost basis and cannot be written off, although they may qualify for capital gain treatment on sale. The costs of financing or interest on your purchase is also deductible. Many people pay cash for their animals so writing off the interest is not an issue. The following examples articulate the benefits of tax deductions derived from an investment in alpacas. The examples do not include expenses for feed, veterinarian care, supplies, and transportation.

Capital improvements to your ranch can also be written off against income. Barns, fences, pond construction, driveways, parking lots all 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 forty years.

The original cost bases 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 Farmers Publication I've mentioned explains them well.

Please check with your accountant or tax attorney on any specifics and questions that you may have on the above information.