Financial Benefits
Alpaca Livestock Investments – Tax Advantage
The Economic Stimulus Act of 2008 has significantly increased your purchasing power when it comes to buying alpaca breeding stock under the Tax Code Section 179. The deduction limits have almost doubled for 2008. This makes investing in alpacas this year a very attractive opportunity.
Note the following news from the IRS website:
http://www.irs.gov/newsroom/article/),,id=179227,00.html
IR-2008-22, Feb 21, 2008
WASHINGTON – In addition to providing stimulus payments to individuals, the Economic Stimulus Act of 2008 provides incentives to businesses. These incentives include a special 50% depreciation allowance for 2008 purchases and an increase in the small business expensing limitation for tax years beginning in 2008.
50% Special Depreciation Allowance
Depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property over several years. It is an annual allowance for the wear and tear, deterioration or obsolescence of the property.
Under the new law, a taxpayer is entitled to depreciate 50% of the adjusted basis of certain qualified property during the year that the property is placed in service. This is similar to the special deprecation allowance that was previously available for certain property placed in service generally before Jan. 1, 2005, often referred to as “bonus depreciation.” To qualify for the 50% special depreciation allowance under the new law, the property must be placed in service after Dec. 31, 2007, but generally before Jan. 1 2009.
To reflect the new 50% special depreciation allowance, the IRS is developing a new version of the depreciation and amortization form for fiscal year filers. The new form will be designated as the 2007 Form 4562-FY.
Section 179 Expensing
In general, a qualifying taxpayer can elect to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as Section 179 property, after the relevant section in the Internal Revenue Code.
Under the new law, a qualifying business can expense up to $250,000 of Section 179 property purchased by the taxpayer in a tax year beginning in 2008. Absent this legislation, the 2008 expensing limit for Section 179 property would have been $128,000. The $250,000 amount provided under the new law is reduced if the cost of all Section 179 property placed in service by the taxpayer during the tax year exceeds $800,000.
So what does this mean for the alpaca enthusiast?
Section 179 allows for immediate tax relief. This makes investing not only feasible, but also a financially sound decision. In many cases, your savings through tax relief will exceed your first year’s payments for the alpacas.
Section 179 is a small business incentive for capital spending. It is intended to give the economy a boost. It has a great impact on our business because alpaca breeding stock qualifies for this deduction.
What qualifies for Section 179?
To qualify as Section 179 property, the property must be new or used tangible personal property acquired for purchase for use in a trade or business. Livestock qualifies. Machinery, furniture and equipment qualify. Property contained in or attached to a building (that is not structural) such as office equipment, signs, refrigerators, and computer software (off-the-shelf).
Generally, most movable assets qualify – but permanent structures do not qualify for Section 179. Even used equipment and vehicles qualify if they are new to you. In other words, if you acquire the equipment from a source other than yourself or an entity controlled by you, it should qualify. Specifically excluded are land and land improvements such as buildings. To ensure property qualifies, please reference IRS Publication 946.
How Can I Use Section 179 to My Advantage?
Alpaca breeders and potential alpaca breeders should have a strategy for using Section 179 to their benefit. For example, investors in the alpaca industry may want to complete key breeding stock purchases in 2008 while a larger dollar amount can be depreciated in an accelerated fashion. In addition, amounts that are not claimed as Section 179 expenses can be deprecated at the regular tax depreciation rate. It may make sense to elect regular depreciation if the business will be in a higher tax bracket in the future. It also may not make sense to use Section 179 for an asset that the business plans to resell at a gain.
Utilizing the Section 179 deduction is a choice each business has to make.
Recap:
Economic Stimulus Act of 2008 Tax Incentives:
Business owners can elect to expense up to $250,000 (increased from $128,000) of qualifying property (up to $800,000 in value) instead of taking depreciation for assets put into service in 2008.
Businesses are now allowed a 50% bonus depreciation on assets placed into service in 2008.
Here is an example of how these new tax benefits can be calculated:
- A $500,000 asset is placed into service in 2008
- $250,000 may be expensed under Section 179
- $250,000 remains to be deprecated
- A further $125,000 may be expensed as Bonus Depreciation (50% of $250,000)
- Asset now has a $125,000 base from which to take standard first year depreciation
- For this example, we’ll assume 5-year property = $25,000 first year depreciation
- Total deduction in 2008 is $400,000 on the asset
- Remaining $100,000 cost of the asset is recovered under the otherwise applicable rules for computing depreciation
****This information is provided for informational purposes only and is not to be considered tax or legal advice. Each person’s tax situation is unique, and you should check with your tax professional for information that is tailored to your particular situation.