Small businesses benefit from Section 179 deduction

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 $100,000 with that level indexed for inflation for the last several years. This is four times more than the previous-law limit of $25,000. In addition, the investment limitation also has been increased to more than $400,000 and it, too, is indexed for inflation.

These changes mean that in 2006, a business can expense $108,000 in capital expenditures up to an overall investment limit of $430,000. Eligible propertyProperty 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
• Livestock
  

Also, the definition of eligible section 179 property was expanded by the 2003 legislative changes to include off-the-shelf computer software. Previously, it had to be written off over three years.

The IRS says ineligible property includes:

• Buildings and their structural components
• Income-producing property (investment or rental property)
• Property held by an estate or trust
• Property acquired by gift or inheritance
• Property used in a passive activity
• Property purchased from related parties
• Property used outside of the United States
  

How, when to use deduction The Section 179 election is made on an item-by-item basis for eligible property. You don't have to use it on all eligible property bought in that year. The election must be made in the tax year the property is first placed in service.

The Section 179 deduction isn't automatic. Taxpayers who want to take the deduction must elect to do so. You make the election by taking your deduction on Form 4562. When you file this form, attach it to either of the following:

• Your original tax return filed for the tax year the property was placed in service, regardless of whether you file it timely.
• An amended return filed by the due date, including extensions, for your return for the tax year the property was placed in service.
  

Make sure you make the election when you file your original income tax return for that year. You can't later amend your return to elect Section 179. The only exception to this is if you amend your return before the actual due date, including extensions, of your original return.
For example, the maximum extended due date to file your return is Oct. 15. You file your return on Sept. 1 and then realize you didn't utilize the Section 179 deduction. You still have until the Oct. 15 deadline to file an amended tax return to claim the deduction.

Laws tweaked to enhance Section 179 deductionsCongress periodically reviews the amount a taxpayer can claim as the annual Section 179 amount. As part of an economic stimulus and tax-reduction package signed into law in May 2003, the expense limit was temporarily hiked from $25,000 to $100,000.

The Tax Increase Prevention and Reconciliation Act (TIPRA), signed into law on May 17, 2006, expanded this increase through 2009.
And an inflation adjustment component means that the $100,000 will increase while TIPRA is in effect.

Lawmakers upped and subsequently extended the section 179 deduction amount in the hopes it would encourage businesses to invest in new equipment sooner. However, when it comes to vehicles purchased utilizing the Section 179 break, legislators took back some of the benefit as it related to large sport utility vehicles. When the limit was originally increased, business owners were allowed to select for company use one of several light-truck models (which included many luxury SUVs) weighing more than 6,000 pounds fully loaded and write off most, if not all, of the costs on their tax returns. That changed on Oct. 22, 2004, when the American Jobs Creation Act became law; now only company vehicles weighing 14,000 or more are eligible for the larger deduction amount.

Any amount of property over the maximum deduction must be depreciated.
Limitation on annual amount of property purchased There also is a limit on the annual total of deductible property. If the cost of qualifying Section 179 property you put into service in a single tax year now exceeds a statutory base of $400,000 then you can't take the full deduction.
This amount also is indexed for inflation and runs through 2009.
For 2006, every dollar above $430,000 (the inflation-adjusted limitation) that a business owner spends on eligible property, he loses a dollar in deductions.
For example, a manufacturer completely re-equips his facility this year at a cost of $437,000. This is $7,000 more than allowed, so he must reduce his eligible deductible limit to $101,000: the current $108,000 expensing limit minus $7,000.
Deduction limited to taxable incomeYou have now determined the maximum deduction based on the amount of property purchased during the year. You now must pass the aggregate income hurdle.
Your deduction is limited to your aggregate taxable income from the active conduct of any trade or business. Active trade or business includes employee and spouse's wages, sole proprietorships, partnerships and S corporations. Basically, this means that unless you have other sources of business income, your Section 179 deduction can't create a taxable loss for your business.
More business owners are able to take advantage of the deduction when they combine their company earnings with those of a spouse or money earned in addition to (or before starting) their own company income.
For example, you are someone else's employee for most of the year. Your wages exceed the Section 179 deduction. You start your own business at the end of the year and purchase equipment and furniture. Even if your new business doesn't generate gross income that year, you can still take the Section 179 deduction on the new equipment and furniture. Why? Your wages exceed the Section 179 deduction.
This aspect of inclusion also applies to a spouse. For example, you earn annual wages of $60,000 as an employee. Your spouse doesn't work during the year but begins a new business at the end of the year. Your spouse purchases and places in service $15,000 of Section 179 property at the end of the year. Your spouse's business doesn't generate gross income at the end of the year. Even though your spouse hasn't earned trade or business income for the year, the Section 179 deduction of $15,000 is still allowed in full since your wages count as trade or business income.
Any amounts disallowed by the trade or business taxable income limit are carried over to the next year and added to the cost of any eligible property placed in service in that year. The same rules for maximum deduction, maximum annual investment and taxable income apply to the next tax year as well. .
ConclusionThe tax tip explains the process for using Section 179 to fully expense certain business expenses immediately instead of depreciating them across a period of several years. You should also be aware of less obvious advantages of the Section 179 deduction:
· Lowers adjusted gross income, which could help you qualify for various deductions which are limited by AGI.
· Lowers earned income, which can increase your earned income credit.
· Is allowed in full even if the eligible property is placed in service on the last day of the year.
This tip also includes examples that demonstrate the three limits: the maximum dollar limit, the investment limit, and the taxable income limit. By including employment and spousal wages, many taxpayers find they are able to take advantage of this provision. Are you interested in more information? Refer to Chapter Two of IRS Publication 946: How To Depreciate Property.

Hay, good lookin'

I found this humorous article about the alpaca industry in the UK. While it's not extremely informative, it does give a idea of the health of the industry outside the US.

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Thursday, August 17, 2006

OK, we admit it – she's not a traditional Page 3 stunner but at least Pia the alpaca does not want to bring about world peace.

And, despite living in an image obsessed society, the orthodontically challenged animal is doing rather well – as are many of her friends.

Alpacas are replacing sheep in fields up and down the country and are becoming one of our most successful immigrant species.

The South American animals, which are more usually found in the mountains of Peru, count both llamas and camels as relatives.

There are about 20,000 in Britain and their numbers are growing at a rate of about 20 per cent each year.

Peter Watson, one of 300 alpaca breeders in the country, keeps about 35 of the animals on his farm in Devon. He says they are very easy to look after.

'They are used to surviving in the harsh conditions of the Andes, so here there is virtually nothing you have to do,' he said.

'Apart from breeding – which they have to do naturally – they are easier than any other farm animal.'

Their soft fleece comes in 22 natural colours and is more luxurious than sheep's wool.

And they offer quantity as well as quality, producing more than ten tonnes of fibre per year, making them Britain's largest indigenous producer of natural luxury fibre. Alpacas cost from about £500 but a quality breeding female could set you back £8,000.

Perhaps best of all, they don't have an annoying baa like sheep – they produce an inquisitive hum instead.

Ohioans Flock to Alpacas as Investment Alternative

July 11 (Bloomberg) -- Barbara Wille doesn't have to go far to breed Crown's Bay, her prize black male alpaca, for a stud fee of $2,500. Ohio has more alpaca farms than any other state, so she just loads Crown's Bay into her minivan for a short trip.
``We always get stares,'' said Wille, 61, who raises 23 alpacas with her husband Ed, 66, on their farm in Valley City. ``He looks like a head on a stick to passing cars.''
The Willes say they have earned $200,000 since starting up in 1994 by selling the furry creatures, winning stud fees and housing 12 alpaca boarders for $3 a day. Investors industrywide are paying $5,000 to $1 million per animal, said Cheryl Laufer, 52, owner of Spirit Wind Alpacas of Newbury, Ohio. They're betting that alpaca fiber, softer than cashmere and warmer than sheep's wool, will become the luxury fabric of choice.
The combination of inexpensive grazing land, a failing manufacturing economy and the influence of several large farms has made Ohio the U.S.'s alpaca capital. The state has 435 farms with 8,000 of the animals, which are cousins of the llama and camel. About 12 percent of all alpacas registered in the U.S. are in Ohio, according to the Alpaca Owners & Breeders Association in Nashville, Tennessee.
``Alpaca farming provides us with the quiet lifestyle we wanted for our retirement,'' Barbara Wille said. ``It's a nice supplement to our retirement income.''
Even small-scale farmers can make returns of 30 percent to 50 percent over the lifetime of an alpaca, Laufer said. The animals live 15 to 20 years. They can be fully insured, and ranching tax laws allow the write-off of some expenses, said Laufer, a director of the Alpaca Farmers & Breeders Association, which represents the industry in Ohio.
``We're doing better with this than we ever did in the stock market,'' she said. ``It's the investment you can hug.''

South American Imports

Alpacas, which stand 5 feet (1.5 meters) tall and weigh as much as 165 pounds (75 kilograms), are native to Peru, Chile and Bolivia. They communicate with a humming sound, especially between mother and cria, the term for baby alpacas. The animals began to be imported to the U.S. in 1984, and some of the first ones from Peru ended up in Ohio.
Farming them isn't without risk. Mass production of alpaca fiber is still 10 to 15 years off. Profit now comes from selling animals to other breeders rather than selling the fleece itself, leading critics to call alpaca farming a type of pyramid scheme.
``Alpaca ranches are primarily small-scale operations, whose owner-investors may lack the expertise and resources to conduct independent investment analysis,'' professor Richard Sexton and teaching assistant Tina Saitone at the University of California, Davis, wrote in a September study titled ``Alpaca Lies? Do Alpacas Represent the Latest Speculative Bubble in Agriculture.''

Ruminants' Diet

Laufer's investment has paid off so far. She sold a young alpaca in January for $18,000. The cost of care for one year is about $380, according to the study. Alpacas are ruminants that eat orchard grass and graze. They don't consume as much as horses, so farms can put six to 10 alpacas on an acre, compared with one horse per acre.
Much of the popularity in Ohio can be traced to marketing done by Jerry Forstner, the 64-year-old owner of Magical Farms in Litchfield, the largest alpaca farm in the state. He got his start in 1993 after reading about the animals in USA Today. He sold his 40 horses to make room for alpacas, thinking they would become a better investment.
Forstner has bought cable- and satellite-television commercials and hosts an annual auction, the Magical Farms Breeders Choice. He spends as much as $500,000 on the two-day event, which draws more than 1,000 breeders from around U.S. with steak dinners, lectures and the sale of Forstner's pack.
The average price of an alpaca sold at the 2005 auction was $49,571. His black, two-year old male, Eternal Flame, sold for $361,000, and Shaquille, a gray male, sold for $310,000.
True Believers
Forstner says the business is among his most profitable investments, which range from a plastic-bag factory in Honduras and a box plant in Georgia to commercial real estate and 42 Lube Stop Inc. oil-change garages.
``Alpacas are my favorite business,'' he said. ``All of my other businesses have had a business cycle at least twice in 20 years. This hasn't had any.''
There is ``overwhelming evidence'' those prices won't last, according to the University of California study. As the number of alpacas in the U.S. increases, the price for wool and animals will drop, according to the study.
Farmers such as Laufer remain undeterred.
``Those of us who have gone into alpaca farming truly believe the market will develop,'' she said. ``In the meantime, we're having fun.''

Alpaca Market Prices are Sustainable

As an addendum to my article from yesterday, I have heard U.S. alpaca industry
critics say that the market prices commanded today are not sustainable or supported
by any real economic underpinnings based on the animal's byproduct (ie. Fiber).
I contend that market prices are supported by sound breeding stock values and
are sustainable over the long term. It's interesting to note that the U.S.
is not unique in this regard. In other countries such as New Zealand, breeders
enjoy equivalent market prices for their alpacas. See the Palmerston North newspaper
article below.

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01 August 2006

By KELLY GREGOR

Alpaca lovers from around the country were in Palmerston North during the weekend
for a conference.Sometimes confused with their less glamorous cousin the llama, alpacas are
mainly bred in New Zealand for their fibre.

Conference goers and members of the New Zealand Alpaca Association discussed breeding options and fibre quality, while visiting local farms in the region.

Despite a small population of 4000 nationwide, the industry is growing, with
passionate breeders looking to mate females with the best, conference goer
Alistair Newton said.

Due to numbers, New Zealand is unlikely to be a great producer of fibre.

At the moment the market supports a domestic demand, he said.

Males can retail anywhere from $20,000-$180,000.

Most breeders bring in males from other farms to mate, the process has been
nicknamed "squeals on wheels."

New Zealand breeders are trying to refine the microns to a lower count by
enlarging the gene pool. "The lower the better, with a low micron count the
wool's softer.

"We want to get it to 16, but anywhere between 23 and 25 is good," Mr Newton
said.

The cross-section of the hair's diameter is measured to see how thick it is.

We want the fibre to be really fine, finer than merino, he said.

Conference goers were quick to dispel any myths about alpacas and their spitting
habits.

Pukekohe breeder Lynda Mathews said the males usually only spit when fighting. "It's
not true they spit like camels, the females spit at the males once they're
pregnant, that's how we know," Mrs Mathews said.

The fibre collected from the alpacas is spun into wool.

There are two types of wool - huacaya and suri.

Suri is rare in New Zealand.

A Banker’s Take on the State of the Alpaca Industry

I keep seeing references to a 2004 article written by Tina L. Saitone and Richard Sexton as the definitive counter to the long term price stability of the US alpaca industry. While Saitone and Sexton are credible critics based on their education and affiliation with the Department of Agriculture at UC Davis, I believe their view of the industry’s dynamics is myopic at best.
The article; Do Alpacas Represent the Latest Speculative Bubble in Agriculture? Is well written and convincingly argues that the economic value of the alpaca, pegged solely to the market value of its fiber does not and can not support the breeding stock prices commanded in the marketplace.
As a consummate analytic, I initially struggled with the appearant fiber/breeding stock value contradiction as well. While it is true that fiber is the only useable and renewable product produced by an alpaca, a market value model based on fiber prices can only be used as a measure of the animals worth when a functioning fiber industry exists.
The Saitone/Sexton analysis is flawed as the domestic alpaca population and the quality of their fiber will not support such an industry at this time.
After much analysis and research, I came to understand that today’s industry is driven by "breeding values" meaning the overall quality of an animal and its ability to reproduce a variety of desired phenotypic traits of which fiber is but one.
Our whole industry today is driven by the rarity of the animal and the quest to continually improve the quality of breeding stock in order to one day support a fiber industry.
One would expect that alpaca prices will decline over time as the domestic population increases and the gap between high and low quality breeding stock closes. It’s my opinion that at the point where the population is adequate to support a fiber industry, the market value of the “majority” of alpacas will be driven by fiber commodity prices much like the sheep industry is today.
But, when will such a decline occur?
From an optimistic perspective, one can say the time horizon is quite long if using the South American alpaca industry as a guide.
If we use the Peruvian model of 2.5 million alpacas to support a fiber industry, it will take another 20 years before the alpaca population will reach a comparable level and alpaca prices drop to the $1,000 to $5,000 levels currently commanded for other fleece bearing animals such as sheep whose stock prices are generally driven by fleece market values.
By contrast, the US Llama industry, driven by the domestic demand for camelids enjoyed 20+ years of high breeding stock prices until the US population reached roughly 400,000 animals and prices began to drop. While the animal is somewhat similar to alpacas, the dynamics of the fragmented Llama industry are not. By comparison, the alpaca industry enjoys a well organized national organization and superior registry. In addition, the animal has far more appeal due to its fleece potential and ease of handling.
Another important dynamic in live stock trading is the demand for “breed standard” animals in general. Whether horses, sheep, cattle or dogs, high quality breeding stock always brings high prices at market because serious breeders need such stock in order to continually improve their herds regardless of the size of the population.
For example, I recently surveyed a list of Angus Beef auction results from 2006 and found that top bred heifers captured auction prices ranging from $15,000 to $120,000. Prices averaged $4,500 per Angus heifer. To use the Saitone/Sexton argument, the market prices for these cattle are in no way supported by the price per pound for beef yet breeders were willing to exchange hard-earned dollars for these animals without regard for the size of the domestic Angus herd.
Why? Because of their breeding value.

In their article, Saitone and Sexton suggest the alpaca industry represents the latest speculative bubble in agriculture and that current price levels and their rate of increase are not sustainable.
I would agree with their position if auction prices were representative of all prices paid in the market place. As anyone knows, auctions entice the buyer to bid “against him/herself” and perhaps against others strategically attempting to artificially push prices high in order to gain market credibility by setting records. In their analysis, average prices are cited. Any statistician will argue for the use of mean prices for such an analysis rather than average prices becasue the aberant high prices artificially inflate the average.
Based on my experience, breeding females of good quality can be bought (or sold) for $18,000 to $25,000 today which is not significantly higher than the prices paid by the original importers in 1985. When you add to the mix the higher quality of the domestic herd today as compared to the original imports, the price of $18,000 to $25,000 is a bargain.
We buy and sell alpacas off our farm and within this price range consistently and we see no evidence of a speculative bubble.

Are the high six figure prices paid for alpacas at auctions sustainable? Who knows?

Can reasonable prices, based on quality be sustained over the long haul? Absolutely.

Any business enterprise has some speculative element to it. Alpaca farming is not a short term, get-rich-quick opportunity. The industry is enjoying a period of high visibility and the lure of quick returns may attract some short term investors to the industry which may drive prices to artificial levels for a while. It happens in every industry at some point. However, for the alpaca breeder with a long term view and a business model based on trading within realistic price levels, current prices are sustainable over the long haul.

Penned Baby Alpacas Killed by Loose Dogs

By Lawrence GleasonWednesday August 02, 2006Morinville Mirror — Two dogs, pets in a subdivision neighboring a Sturgeon County farm, had to be put down after the pets got into a pen of alpacas and killed two of the animals, one a month old and one only days old. The life of another alpaca was threatened before the incident was stopped. “They had that black one down and they weren’t stopping,” said Pete Peeters of Peters Pride Alpacas.
Peeters, a former NHL goalie and last season’s goalie coach for the Edmonton Oilers, said on that morning he and his wife Laurie were setting up for the Country Soul Stroll, the recently held county-wide driving tour, and then went inside the house for lunch.That lunch break was all it took for the mayhem to happen. Laurie Peeters said she noticed right away there was a problem when she saw the mother of the youngest baby alpaca without the baby.“I knew something was wrong. She wouldn’t have been without it.”Pete Peeters said chasing the alpacas likely started out as a game for the two pet dogs. “It doesn’t matter how far away you get from the wild state, that is still in them and some point it is not a game. They wanted blood, they had a taste of it and they weren’t about to stop.
”Peeters put one dog down and called the owner of the other who put his own dog down.“They were all very nice people,” Peeters said. “I have no doubt they treated their dogs well and I have nothing bad to say about them.”The Peeters farm, on Range Road 241 near Namao, is near near the subdivisions of Cameron Park, Sturgeon View Estates, and Namao Ridge. The dogs did not come from the subdivisions, said Sturgeon County Constable Barry Bamford. “The tags on the dogs helped a lot,” said Peeters. Sturgeon County bylaws allow subdivision residents to keep four pets, including three dogs, on their property, unless an exception is made through a petition of area residents.