What qualifies as business deductions?

All legitimate business expenses and improvements are either direct farm deductions for that taxable year or can be amortized (depreciated) over several years.  In some instances the owner has the option of taking the deduction all in the first year or amortizing over multiple years.  Either option offers different types taxable benefits to the business owner and should be made with the advice of a reputable tax account.

2008 Economic Stimulus Act Provides Tax Benefits to Businesses

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-percent 
depreciation allowance for 2008 purchases and an increase in the 
small business expensing limitation for tax years beginning in 2008.

50-Percent 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 percent 
of the adjusted basis of certain qualified property during the year 
that the property is placed in service. This is similar to the 
special depreciation allowance 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 percent 
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-percent 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.

The IRS section 179 has been around for many years and is intended to serve an an economic incentive to spur small business growth and development.  This IRS code allows businesses to take the full amount of deduction in the first year for significant capital outlays.  The business owner can also choose to depreciate the investment over several years as well;  it is the business owner's choice.  

Typically, if property for business has a useful life of more than one year, the cost must be spread across several tax years as depreciation with a portion of the cost deducted each year.

But there is a way to immediately receive these income tax benefits in one tax year. The provisions of Internal Revenue Code Section 179 allow a sole proprietor, partnership or corporation to fully expense tangible property in the year it is purchased.

And tax-law changes over the past few years have made this option much more appealing by dramatically increasing the amount that can be written off immediately. Changes first made in 2003 and then extended in 2006, mean that businesses can write off more of their capital expenditures through 2009.

Enhanced section 179 expensing now is at the base level of $250,000 with that level indexed for inflation for the last several years. This is ten times more than the previous-law limit of $25,000. In addition, the investment limitation also has been increased to more than $800,000 and it, too, is indexed for inflation.

Eligible property
Property that may be written off in the tax year of purchase, rather than depreciated over the asset's useful life, includes:

• Machinery and equipment
• Furniture and fixtures
• Most storage facilities
• Single-purpose agricultural or horticultural structures

For example:  The alpaca investor who buys 3 females for $60,000, build a barn for $20,000, a fence for $10,000 and purchases other needed equipment for an additional $10,000 can take all of these expenses as first year deductions for the full $100,000 invested.  Depending on your personal tax bracket the tax benefits can be significant and provide the investor with an economic stimulus to get started in the alpaca business.

In addition there are tax deferral and wealth accumulation to consider!

One of the very real benefits of alpaca farming is the tax deferral and wealth accumulation that can be achieved by growing a herd.  Many investments become taxable as they occur.  With alpacas the owner can grow the herd and your balance sheet assets but not realize any taxable consequences until they are sold. 

Now for the all famous disclaimers:  Tax laws are complicated and certain tax advantages benefits may depend on YOUR own personal circumstances.  As always consult with a tax professional!

Have your tax professional review:

IRS section 179

Publication 225 IRS farmers tax guide

Publication 946 How to depreciate property