Profit Motive

Those of us with small farms must be aware about the distinction between hobby farms and farm businesses as determined by the IRS.

Hobby farms are maintained exclusively for personal pleasure without expectation of significant profit.

However, farm businesses exist to make a profit. If the farm can make a profit in 3 of 5 years, the IRS considers that farm to be a legitimate business.

But, many farms fail this profit rule for various reasons. In the alpaca business, it can take several years to show a profit especially during the start-up phase. Your dams may produce predominantly male cria which sell for less than female cria. You may decide to grow your herd, and keep your female cria for several years Also, there are risks with alpaca farming such as the miscarriages, health issues, and even death. The economy is a variable that the alpaca owner cannot control either.

Luckily, the IRS does provide nine factors to consider in determining whether a profit motive exists. You do not need to meet all of these factors, but you should try to meet as many of them as possible.

Business-like Manner
Do you run the activity in a business-like manner? Do you keep your business funds separate from your personal funds? Do you have a separate checkbook for your business? Do you keep accurate business records? Do you operate the business to increase profits? Are you incorporated or are you a limited liability company (LLC)?

Expertise
Do you have pertinent expertise to operate the business? Do you enhance your expertise with continuing education? Do you consult others with more expertise?

Time and Effort
Do you spend time and effort on activities needed for the business to be profitable? These activities should not be purely pleasurable, but must be profit-driven.

Asset Appreciation
Will the business assets appreciate in value with time to cover the expenses of the business? In the alpaca industry, we call it alpaca compounding as your herd value increases through breeding.

Previous Success
Do you have previous success in profitable businesses?

Business History
Why did the business losses occur? Were the losses beyond your control? Were they due to start-up, economic downturn, breeding losses, or unforeseen circumstances? How does your business history compare to other similar businesses? Most alpaca farms do not make a profit for quite a few years due to long pregnancies.

Occasional Profit
Is your occasional profit significant when compared to the size of the investment? Selling a few skeins of alpaca yarn is not the same as selling an alpaca.

Financial Status
Is the business a primary source of your income? Do you have substantial income from other sources? Your profit motive is higher the more you rely on the income from this business.

Personal Pleasure or Recreation
Although you should enjoy your work, your activities should not be predominantly for personal pleasure or recreation. Instead, the activities must be motivated by profit. A written alpaca business plan may help to convince the IRS that you have a legitimate business.

In the alpaca industry, you will have a difficult time showing a profit in 3 of your first 5 years due to the nature of an alpaca business. Thus, you most likely
will need to qualify for profit motive by using the
above nine factors.

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