While certainly cuter than the state of Delaware or a Swiss bank account, Senator Jeff Flake (R - Arizona) said alpacas in the U.S. are basically just living tax shelters that people buy not to get into the nascent alpaca wool industry but to take advantage of tax loopholes to lower their bills, according a report recently released by the senator's office
The cost of purchasing livestock such as alpacas can be deducted as a business expense immediately, versus depreciated or over time as it would be for machinery or other equipment, through Section 179. Up to $500,000 can be written off in a single year, said the report, which can create scenarios where a tax filer can avoid paying any federal income tax at all through Section 179 allowances. Flake's report said alpaca breeders are ideally positioned to take advantage of Section 179 because, relative to other animals, they're more expensive and easy to maintain. Further, they need little space, which makes it easier for taxpayers to claim their home as a farm because their small backyard has an alpaca or two.
"If a taxpayer in the 25 percent tax bracket paid $7,000 to purchase two alpacas, for example, Section 179 expensing would result in an immediate tax savings of $1,750. Under the regular depreciation rules, this amount would be spread over a period of years," said the report.
Flake's report said it would be one thing if these tax breaks were supporting an active industry, but noted that there isn't really a large market for alpaca wool in the U.S. and so accused many alpaca owners of investing in the animals mainly as a tax dodge, using polls from the Alpaca Breeders Association, as well as interviews with figures within the alpaca breeding industry, to bolster the claim. Finally, said Flake's report, if the alpacas cease producing tax benefits, they're often abandoned.
"The problem is not the alpacas, it is the tax code, which needs to be sheared of perverse incentives to avoid taxes by investing in commodities for which there is little need or real demand. ... Certainly, many got into the business out of their love for alpacas and succeeded. For many others, the up-front tax benefits drive speculative endeavors, such as alpaca farming," said the report.
The Alpaca Owners Association issued a statement in response to the report saying that the senator is "targeting hard working business owners, causing potential harm to an industry he should, instead, celebrate and encourage for their contributions to the economy." The AOA said that the alpaca wool industry still has great promise, and further noted that there is no special alpaca benefit: owners use the exact same part of the tax code that owners of any other livestock would use, and so found it puzzling he would target alpacas in particular.
“Sen. Flake’s accusations of the abuse of alpacas is disingenuous,” said Bud Synhorst, Alpaca Owners Association, Inc. executive director. “I am stunned that the senator would go on national television without all of the facts about the North American alpaca industry!”