A popular trend in early 21st century America is raising alpacas on small farms. Alpacas are camelids native to the Americas. They can be sheared for their wooly fiber, which is valued for making sweaters. They are also very friendly and make wonderful farm pets. The alpaca industry has expanded rapidly because of a federal tax incentive that has caused a lot of controversy. But for many it provides a fun and lucrative tax shelter.
Some people may have heard that the government is directly giving money away in the form of a grant to anyone who raises alpacas. This is not true. What you can qualify for is a tax deduction of the amount that you spent buying alpacas, which increases the size of your tax refund. This came from the Jobs and Growth Reconciliation Tax Act of 2003. You can write off equipment, supplies and labor costs also.
The IRS code in question is the section 179 deduction, which applies to active for-profit farms (as opposed to small “hobby farms”). This means you have to depend on the farm’s revenue for your livelihood. According to IRS publication 225, the Farmer's Tax Guide, you must use less than $800,000 worth of resources in your enterprise during the year in which you take the deduction. Only the first $250,000 will be eligible for deduction.
The IRS code 179 deduction would apply for anyone in the right income bracket running a for-profit farming enterprise of sufficient size. But the tax deductions sometimes bring people into the farming business that would otherwise not be involved at all. They are choosing to raise alpacas because they are easy to care for and fun to keep as pets. They are perceived as being less of a commitment than other, more traditional farm animals.
Fiscal conservatives and free-market libertarians do not appreciate government intervention in this market, and the price inflation that it has stoked. The Giannini Foundation of Agricultural Economics has referred to alpaca farming as “the Latest Speculative Bubble in Agriculture.” Commentator John Stossel discussed the subject on a Fox News broadcast. Critics think it unfair for the government to manipulate markets, and warn that the alpaca bubble will eventually crash, to the farmers’ detriment.