Now that tax season is basically over . . . except for those who have filed an extension . . . it seems appropriate to address a topic which shows up in my inbox throughout the year as well as during tax season . . . the question of deducting alpaca related expenses during the first few years of operation. The email generally goes something like this "I have been doing alpacas for a year or two but have never claimed any of the alpaca related expenses as I was told I could not until I sold something . . . is this true?" The simple and most often the appropriate answer is "deduct".
The IRS addresses this issue in a variety of places . . . the link above goes to Publication 535, Page 5 . . .
Presumption of profit. An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year.
That same publication discusses not-for-profit activities and some of the factors the IRS looks at when they determine whether a business has a profit motive or not.
You can still go back and amend your returns if you feel it appropriate for your particular tax situation. An in depth conversation with your tax preparer should be your next step or begin looking for a new preparer. Not all preparers or accountants are farm friendly . . . even those who are not should be able to assist you in making the decisions required to properly reflect the true picture of your farming activities. Bottom line . . . the tax return is your responsibility . . . it is their duty to advise you on the rules . . . but you are ultimately responsible for the content of your return.
