Generous federal tax benefits and high prices for breeding stock have helped boost the alpaca industry in the United States, and breeders now hope to build up the herd and improve fiber quality enough to support commercial mills in this country.

While all businesses qualify for the same deductions, alpaca breeders may benefit more than some other livestock owners because of the amount of their investments and sales. Breeding stock alpacas can start at $4,000 and go up to hundreds of thousands of dollars for a top stud, compared to sheep, which breeders can get for a few hundred dollars.

A 2010 extension of a tax law allows ranchers to write off the entire cost of buying their breeding alpacas the same year. If the animals are raised for profit, the farmer can also deduct expenses like feed, fertilizer and veterinarian care from their income.

That helped Brian Cole, who recently retired from his electrical contracting business, make the leap from owning just two alpacas to buying a farm in South Strafford with 26. He and his wife now breed and sell the animals, along with their fiber.

“That's why the federal tax laws are written the way they are – to encourage people to invest in business assets,” Cole said. He went on to do the math: “If I have an outside income and I'm paying 40 percent in taxes, I know I can go out and buy a $10,000 alpaca, depreciate the whole thing the first year, and save 40 percent of that in taxes.”

In other words, if he spends $10,000 on an alpaca, he'll pay $4,000 less in taxes that year, he said.

However, Cole was quick to say that's not why he got into alpacas. He wanted to farm and the idea of raising animals he didn't have to kill was appealing.

Alpacas, native to the Andes, are prized for their fiber and are not slaughtered for meat. Common in South America, they were not imported to the U.S. until the 1980s. They are now raised across the nation, with the largest concentrations in Ohio and Washington state.

Cole said the tax deduction is no different than when manufacturers write off the cost of new equipment, and Eric Toder, a senior fellow with the Tax Policy Center, said the specific laws were intended to stimulate investment and try to spur the economic recovery.

But some question providing government support to the alpaca industry.

“This is one of many examples in the tax code where there are some unintended consequences,” said Steve Ellis, vice president for Taxpayers for Common Sense, a Washington-based watchdog group.

“Nobody set out, I believe, to say we want to create an alpaca industry in the United States and this is important and it's worth our tax dollars,” he said. “Because that's what we're doing, we're giving up tax dollars to create it.”

Alpaca breeders and others promote the write-off as a reason to get into the business, he said.

Breeders acknowledge that such financial incentives are partly responsible for the steady growth of their business.

“Are there people that get into it for the tax benefits? Probably. I mean, I'm sure there are. But there are also people that only have two or three in the backyard and just play with the fiber,” said Deb Hill, an alpaca breeder and editor of Alpacas Magazine in Lewistown, Mont.

While there are at least 154,000 registered alpacas in the U.S., about 1 million are needed to support commercial milling on par with the nation's Mohair industry, Hill said. Mohair comes from Angora goats.

The alpaca industry has small mills around the country that produce socks, hats and scarves, and it employs knitters for handmade items. But commercial milling would create far more jobs.

Breeders also note the tax deduction has become less valuable since alpaca prices dropped during the recession.

Female alpacas that would have sold for $15,000 to $20,000 four years ago, now go for about half of that, said Marc Sanderson, a certified public accountant and owner of Shawnee Alpacas in Lake Shawnee, N.J. However, a male just sold last summer for $675,000 at an auction in Phoenix that Cole attended.

The price drop has forced James and Sarah Budd of Alpacas of Montana, Inc. to rethink their operation.

“We went from buying and selling animals, focusing on breeding and going to the show ring and showing our animals to now we are also highly concentrated on our textile lines as well,” James Budd said.

Three years ago, the Budds sold 30 to 40 alpacas. Last year, it went down to 20, and they expect to sell 10 this year, he said.

But sales of products made from alpaca fiber – sweaters, hats, socks – have increased 124 percent, and they are launching a new line of socks for running, hiking, skiing, and other activities, James Budd said.

“I think this is a bit of an experiment having alpacas here in North America, but it's not an experiment with a ton of risk because we already know there's an international market for the fiber that's been in the making for hundreds of years,” Hill said.

US alpaca herds grow as breeders get tax write-off (Associated Press)