Why Alpacas?

Short Facts
Alpacas: The World's Finest Livestock Investment
Who Buys Alpacas?
Creating a Herd
Tax Advantages

If you are new to alpacas, you already know that they are intriguing creatures, but you're probably wondering exactly what the heck they are. I was in your place once, so I'll try to anticipate a few questions you may have.

Alpacas are camelids. They are a distant cousin to the camels you see in the movies and at zoos. In the middle east, camels are beasts of burden, but in South America, alpacas were genetically refined over centuries to have a soft, strong, luxurious fleece (called "fiber" in alpaca circles). In ancient South America, alpaca fiber was prized as being the "Fiber of the Gods" in the Incan civilization. Museums throughout the Americas display textiles made from alpaca fiber.

Short Facts:

Alpacas can be insured against loss.

Alpacas are safe, they don't bite or butt. Even if they did, without incisors, horns hoofs or claws, little harm can he done.

Alpacas do not require butchering in order to be profitable.

Alpacas require minimal fencing.

Alpacas can be insured against loss.

Alpacas are easy to transport, which allows them to be traded across the country or around the world.

Alpacas are considered disease-resistant animals, which lowers insurance and veterinarian costs.

There are two types of alpacas: the suri ("surrey") and the huacaya ("wah-KI-ah"). The main difference between the two is their fleece. Suris have long, beautiful "pencil locks." The huacaya fleece makes it resemble a big teddy bear. Suris are very rare, making up only 2% of the world alpaca population.

Alpacas are useful: they produce fine and valuable fleece as well as make wonderful pets.

The alpaca is a relatively short animal, measuring on about 36" at the withers or where the neck joins the shoulders. They are about 4.5' to 5' to the tips of their ears. Females weigh from 100-170 lbs, and males weigh from 140-190 lbs.

Alpaca herd management is fairly easy. There may be a need for inoculations (1-6 per year to eliminate infectious diseases and parasites), and occasional deworming. Their toenails must be trimmed periodically, and they are sheared once a year.

Alpacas are rare outside of South America and cannot be mass-produced.

The alpaca has eating teeth only on the bottom, and a hard gum (dental pad) on the top against which they can crush grain, hay, grass, etc. in a back and forth motion. They nibble grass down to about 1/4 of an inch; they don't pull the grass out by the roots as can goats and sheep.

The alpaca doesn't eat much and 1 1/2 bales of hay per day in the winter can feed 20 alpacas. In the summer, a little grain (feed) and natural grass is all they require.

Alpacas all defecate in the same spot. In a medium-sized field they may have 3 or 4 spots for communal dung piles, which makes for easy clean-up and better hygiene for the herd.

Alpacas have little or no odor, and don't attract the amount of flies that other species do.

Alpacas: The World's Finest Livestock Investment

Why do people in so many countries call alpacas, “The worlds finest livestock investment?” For any investment to be valuable, it must possess certain qualities which make it desirable. Gold is scarce, real estate provides shelter, oil produces energy, bonds earn interest, stocks are supposed to increase in value, and diamonds symbolize love. Alpacas share many of these investment attributes.

Around the world, alpacas are in strong demand, 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. 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. History has validated the value of the alpaca.

Livestock, or animals raised for profit, was an investment long before financial stocks were sold on the New York Stock Exchange. The richest families of ancient times counted their wealth by the size of their flocks of sheep or herds of cattle. Today, wealth as a result of livestock ownership is not as common, but tending to a graceful herd of alpacas can also be an exciting way to earn a substantial cash flow and live a rewarding lifestyle.

Alpacas have been domesticated for more than 5,000 years. They are one of Mother Nature’s favorite farm animals. They are sensitive to their environment in every respect.The following physical attributes allow alpacas to maintain their harmony with our Mother Earth.The alpaca’s feet are padded and leave even the most delicate terrain undamaged as it browses on native grasses.

The alpaca is a modified ruminant with a three compartment stomach. It converts grass and hay to energy very efficiently, eating less than other farm animals. fineness of staple. Its camelid ancestry allows the alpaca to thrive without consuming very much water, although an abundant, fresh water supply is necessary.The alpaca does not usually eat or destroy trees,preferring tender grasses that it does not pull up by the roots. A herd of alpacas consolidates its feces in one or two spots in the pasture, thereby controlling the spread of parasites,and making it easy to collect and compost for fertilizer.

An alpaca produces enough fleece each year to create several soft, warm sweaters for its owner’s comfort. Alpaca fiber has unique feel, and doesn't cause itching like wool does. Alpacas also have over 20 distinctly different natural colors. Sheared once a year, each animal produces 5-7 pounds of raw fleece. Alpaca fleece contains no lanolin or waste as does sheep's wool, and is a clean, dry fiber. Alpaca fiber is highly-prized by artists and artisans who know the quality of alpaca fiber and products.

Alpacas are safe; they don’t bite or butt. Even if they did, without incisors, horns, hoofs or claws, little harm can be done to people or other animals. Alpacas can range from small to medium in size and are usually very easy to handle. Alpacas are useful: they produce fine, strong, and valuable fleece. Alpacas are fascinated by and love children, and in a majority of cases alpacas make wonderful pets. Alpacas are known to be intelligent, which makes them pleasant to be around and easy to train.

Alpacas are adaptable to varied habitat, successfully being raised from Australia to Alaska and from 15,000 feet to sea level. Alpacas are rare outside of South America and cannot be mass-produced; Alpacas require minimal fencing. Fencing is required to keep predators out of the pasture, but alpacas rarely, if ever, try to escape. Alpacas can be pastured at 5-10 per acre. Alpacas are easy to ship, which allow them to be traded across the country or around the world. Alpacas have a relatively long and trouble-free reproductive life span. The Alpaca’s entire value can be insured against loss, making the alpaca an even more attractive investment to value-conscious consumers.

Who Buys Alpacas?

Alpaca breeders come from many walks of life. For some, alpacas are a source of income, for others a source of pleasure. Young couples with children might own three or four alpacas and enjoy caring for them. Retired couples, who have raised their kids, sold their business, and retired to the country, are often owners. The family whose members include a handspinner might own two or three animals for fiber production. Several large breeders are veterinarians who have found the ownership of alpacas to be more rewarding than practicing veterinary medicine. Many herds are owned by families where one spouse has a city job, and the alpaca business is managed by the other on their small acreage in the country. A large number of breeders are working couples who tend to their herd in the evening after work. All of these alpaca breeders, big and small, enjoy their animals and feel good about owning an investment they can hug.

Some owners don’t actually raise their animals on a day-to-day basis. They live in the city, and are building their herd toward the day they might change careers or retire to the country life. For all owners, alpacas offer a great way to diversify their financial portfolio with a commodity that is both rare and in demand worldwide.

There are large ranches with over 500 alpacas, and small farms of only two or three alpacas. The average alpaca herd is made up of about eight to ten alpacas. Most herds start out small and evolve to the size that fits the breeder’s farm and financial goals.

Almost all breeders are in business for the long haul; they believe in the future of the animal. With the small number of alpacas currently available, there will be an extended and steady demand for breeding stock to continue meeting the needs of our growing industry for many years.

It is important to recognize that alpaca ownership has inherent risks as do all livestock and financial investments. It is recommended that you talk to breeders to familiarize yourself with the risks as well as the rewards of alpaca ownership.

Creating a Herd

First, determine your goals for alpaca ownership. Would you like to own an inexpensive pair of gelding males for fiber production or as pets for you and your family? Are you going to be a full-time or part-time breeder? Will you invest in alpacas for current financial returns or are you going to build a herd toward the day you retire?

Once you've decided on your goal, the path to alpaca ownership will be more easily defined. Maybe you've decided to start a small herd and let it grow over a period of time before retiring and living off the income the herd produces. If so, you'll have the power of compounding on your side.

If you're interested in acquiring a producing alpaca herd with immediate sales, you may want to consider a larger initial outlay. You would probably buy a number of pregnant females who would deliver a cash crop of cria immediately. This larger expenditure might also encourage you to become more involved in the industry and spend more time marketing your herd. Some breeders with larger herds have full-time ranch managers or hire additional labor to assist them with the day to day chores.

However you choose to be involved, there is an “Alpaca Approach’’ suitable for you. The industry is very young and represents a ground floor opportunity. Very few investments have the potential to reproduce themselves every year as an alpaca does. Today's smaller breeder can choose to be almost any size in the future. An owner who likes the return alpacas offer, or the lifestyle they provide, can choose any level of investment.

Tax Advantages

Raising alpacas at your own ranch, in the hands-on fashion, can offer the farmer 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, veterinarian care, etc., but also the depreciation of such tangible property as breeding stock, barns and fences. These expenses can also help shelter current cash flow from tax.

The less active owner using the agisted 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 his breeding stock and expense the direct cost of maintaining the animals. The main difference between a hands-on or active farmer and a passive owner involves the passive owner’s ability to deduct his investment losses against his other income. The passive investor may only be able to deduct losses from his investment against gain from the sale of animals and fleece. The active farmer can take the losses against his other income.

Alpaca breeding allows for tax-deferred wealth building. A small owner can purchase several alpacas and then allow his herd to grow over time without paying income 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 CD could not be depreciated, thereby offsetting the tax due on current income.

We recommend that you engage an accountant for advice in setting up your books and determining the proper use of the concepts discussed in this brochure. 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.

To qualify for the most favorable tax treatment as a farmer, you must establish that you are in business to make a profit. You cannot raise alpacas as a hobby farmer or passive investor and receive the same tax preferences as an active, hands-on, 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 businesslike 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.
· 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 activity 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 determination. Once you’ve established that you are farming 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 be different.

Frst, the following items must be included in both a passive investor’s and a full time farmer's gross income calculation:

· 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

The following expenses may be deducted from this income. Please note, if you are agisting your animals, not all of these deductions may apply on a current basis.

· Vehicle mileage for all farm business miles (IRS publishes current rate)
· 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)
· Farm 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 or investment-related travel expenses
· Educational expenses, which improve your farming or investment expertise
· Advertising
· Attorney fees
· Farm fuel and oil
· Farm publications
· AOBA (breed association) dues
· Miscellaneous chemicals, i.e., weed killer
· Veterinarian care
· Tools having a useful life of less than one year
· Agistment fees

Please note: For hands-on farmers, personal and business expenses must be allocated between farm use and personal use; only the farm use portion can be expensed for such expenses as telephone, utilities, property taxes, accounting, etc.

Once active alpaca farmers 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 farm property. You need to become familiar with these rules.

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 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 cost 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, trailers 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. This allows for the hyper-depreciation of up to $24,000 in 2001 and 2002, and will increase to $25,000 for the year 2003 and beyond. While this is subject to several limitations, it is widely utilized by small farms to accelerate expense, if that is appropriate for your tax situation. Owners currently in high tax brackets that 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 Farmers 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. Ordinary income is currently taxed at a maximum rate of up to 39.6 % and long-term capital gains are taxed at rates of up to 20 percent. 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 cria that you do not intend to use in your breeding program, would be classified as inventory and produce ordinary income on sale.

The capital gains treatment of sale proceeds has become an even more attractive benefit of investing in alpaca breeding stock due to the 1997 Tax Act reduction in the capital gains tax rate to a top rate of 20% (from 28%) for assets held long-term (over 12 months). It also created a new 10% capital gains tax rate for taxpayers in the 15% ordinary income tax bracket. The tax break provides a slightly lower maximum rate (18%) in future years for investments held at least 5 years.

There are other tax-saving strategies that can be utilized in concert with investing in alpacas. For instance, you generally can deduct the fair market value of a capital asset that you contribute to a qualifying charity or institution. You can also exchange like for like assets and avoid the tax of a sale. An example of this strategy would be an owner who wanted to diversify his bloodstock. If he sold his alpacas and simply bought more, he would be required to pay tax on his gains. If he exchanged his alpacas for others, there would be no tax due. Employing the exchange concept can be very beneficial; for it to work efficiently, a third-party buyer is usually introduced into the transaction. The model for this type of transaction would be a real estate exchange. A CPA would be familiar with the use of “like kind” exchanges and how it might benefit you.

Installment sale rules allow you to defer income to future years. If you sell an alpaca with credit terms, you can defer your gain until you receive payment (excepting that portion of the gain that is subject to depreciation recapture rules). If an animal dies of disease and is insured, you can use the involuntary conversion rules in the code. These rules allow tax-free replacement of your animal.

This discussion of tax issues omits a number of rules that could impact your taxes. Tax preference items, alternate minimum taxes, employment taxes 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 CPA’s and on occasion an attorney.

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 offsetting your ordinary income from other sources with expenses from your farming business. Wealth building by deferring taxes on the increased value of your herd is also a big plus. It pays to keep your eye on the tax law changes instituted by Congress. On occasion, you may find a silver lining in the clouds of government.

The alpacas make a small footprint on the environment. Their pasture is as it was before their arrival. Unlike other animals, they won't make a mud flat of your pasture. They are perfect animals for a small farm like ours because they don't require huge vistas of grass. A couple of acres will do just fine. In order to maintain the farm, we must sell a few periodically, and we've vowed that we would entertain all offers. We offer financing and will board your animals as well. So click on over to our sales page, or our photo page. Learn about alpacas at our "all about alpacas" page. Go to our contact page, and send us an e-mail. If you wish, we will set up an appointment for you to see these wonderful animals for yourself; you'll be glad you did.