1492027816746 - The great alpaca investment bubble burst, now US senator says they’re a tax shelter

The great alpaca investment bubble burst, now US senator says they’re a tax shelter

Americans are using alpacas as tax shelters, a senator has warned, drawing outraged denials from an outspoken cottage industry and renewing a controversy over the cute but contentious creatures.

Arizona Republican Jeff Flake has argued that owners are writing off the cost of buying alpacas along with related improvements to their property as business expenses.

While the US federal government allows taxpayers to deduct business expenses – such as for hardware, software, tools and materials – there has long been doubt about whether alpacas are a legitimate business proposition.

Critics of the alpaca industry say that by allowing owners to write off their expenses, the government is, at best, subsidising an exotic pet – and at worst abetting promoters who hype alpacas as an investment opportunity in order to increase the value of their own herds.

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Economists suspect that hyping may have played a role in the alpaca investment bubble last decade.

In 2005, the average male sold at auction fetched over US$70,000 (NZ$100,000), implying significant savings for purchasers who used the tax exemption intended to stimulate business investment.

The creatures, smaller cousins of the llama, were being pitched to buyers as an about-to-boom industry, promising the market for alpaca fleece was on the cusp of taking off.

But those making the pitch often owned and sold alpacas themselves. By ginning up demand, they were able to inflate the price of their own animals’ offspring, even if those herds would never generate significant revenue, industry observers say.

And like all bubbles built on speculation, it eventually burst: One study found that the price of male alpacas collapsed about 80 percent between 2005 and 2011 as speculators realised the creature was not commercially viable livestock.

Now, Flake and others are once again examining advocates’ claims about alpacas’ economic promise.

The US commercial alpaca herd numbered 141,000 in 2012, according to the Agriculture Department’s census that year – the most recent for which reliable data are available. (The Alpaca Owners Association, a trade group in Lincoln, Nebraska, claims to have registered 250,000 alpacas in North America, but the figure does not account for exports or deaths.)

Alpacas “are treated like any other livestock including cattle, hogs and sheep” for purposes of taxation, said Bud Synhorst, the Alpaca Owners Association’s executive director. He went on to compare the deduction for alpacas to deductions that small businesses enjoy, such as those for equipment and other expenses.

“Sen. Flake was unprepared to talk about the tax code as it relates to the alpaca industry,” Synhorst’s statement read. “I am stunned that the senator would go on national television without all of the facts about the North American alpaca industry!”

Flake did not help his case with the alpaca community when he narrated a video accompanying the report that appeared to be a parody of a televised appeal from an animal shelter.

The video called on viewers to help him protect alpacas that were being “abused”. In this context, the abuse referred to abuse of the tax code, and the shelter was a shelter from the IRS – an elaborate tax-policy joke of dubious taste and questionable comedic value.

Precise data on how much revenue the federal government gives up as a result of deductions for alpacas are not available, and Flake’s report relies on anecdotal evidence.

Given that commercial sales of alpacas totaled just US$32.6m in 2012, according to the Agriculture Department, the total taxes avoided likely would not exceed US$10m annually, Sexton said.

Whatever the exact figure, he said, it is a “minuscule” amount in the context of the federal budget, where the price tags are in billions.

 

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