when is required work attire taxable? - eyfile/ey-when-is-required-work-attire-taxable.pdf · when...
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When is required work attire taxable?
When is required work attire taxable?
When is required work attire taxable? By Debera Salam, CPP, and Deborah Spyker, CPA, Ernst & Young LLP
Businesses frequently require their employees to wear protective clothing such as hard hats, safety shoes, welding masks and aprons. Certain industries may also require that employees wear brand-specific uniforms — for instance, first responders, food servers and retail service representatives.
In TC Memo 2016-79, the U.S. Tax Court ruled that an employee was not allowed to claim a deduction on the federal personal income tax return for employer-required clothing. This ruling is instructional for many employers who frequently inquire about the implications of mandating that employees purchase and wear non-protective clothing while performing their duties.
Under the facts in the case, a clothing manufacturer and retailer required employees working in corporate sales positions to wear the employer’s apparel when representing the company. Employee “A” purchased the company’s shirts, pants, ties and suits, and deducted these costs as unreimbursed employee expenses on Schedule A, Itemized Deductions, which he filed with his 2010 and 2011 Form 1040, U.S. Individual Income Tax Return.
In 2013, the IRS issued a notice of deficiency wherein it determined Employee A was not entitled to deduct as an unreimbursed employee expense the cost of buying and maintaining his employer’s apparel. Employee A disagreed with the IRS and petitioned the U.S. Tax Court to review the case.
Why the clothing deduction was disallowed The Tax Court explained that under IRC §262, a taxpayer generally cannot deduct personal, living or family expenses; however, an exception is made in IRC §162(a) for ordinary and necessary expenses paid or incurred in carrying on any activity that constitutes a trade or business. This exception applies to employees who incur expenses in the trade of business of their employers. (Primuth v. Commissioner, 54 T.C. 374, 377 (1970); O’Malley v. Commissioner, 91 T.C. 352, 363-364 (1988); Kurkjian v. Commissioner, 65 T.C. 862, 869 (1976).)
Under IRC §262, expenditures for buying and maintaining clothing are generally not deductible, even though the taxpayer wears the clothing in connection with his trade or business. (Drill v. Commissioner, 8 T.C. 902, 904 (1947); Cross v. Commissioner, T.C. Memo. 1982-686.)
However, a deduction is allowed if the clothing:
• Is required or essential in the taxpayer’s employment
• Is not suitable for general or personal wear
• Is not worn for general or personal wear (Hynes v. Commissioner, 74 T.C. 1266, 1290 (1980); Yeomans v. Commissioner, 30 T.C. 757, 767 (1958).)
Based on this analysis, the Tax Court ruled that although Employee A was required to wear the clothing while representing the company, it was suitable for general or personal wear and his costs for purchase and maintenance did not constitute a deductible business expense.
If the required work attire is suitable for general or personal wear, the purchase and maintenance costs are not deductible, and the value is included in wages subject to FIT, FITW, FICA and FUTA.
Ernst & Young LLP insights
If employers intend to require that employees incur the cost of purchasing and maintaining certain attire while at work, they should carefully consider the extent to which their employees may be disallowed a tax deduction for these expenses.
Keep in mind also that employer reimbursement for an employee’s purchase of nondeductible clothing is taxable, and the value must be included in employees’ wages. When that’s the case, employers should consider whether they will pay the employees’ taxes on their behalf (i.e., gross up).
Employers should discuss with their legal advisors whether requiring employees to purchase company apparel or bear the cost of required work clothing might violate federal and state wage-hour law. See, for instance, the U.S. Department of Labor’s Fact Sheet on deductions from pay.
August 2016
IRS guidance governing uniforms and work clothing In Publication 529, Miscellaneous Expenses, the IRS states that employees can deduct as a business expense the cost and upkeep of work clothes if (1) they must be worn as a condition of employment and (2) the clothing is not suitable for everyday wear.
The IRS emphasizes it is not enough that the clothing is distinctive (e.g., a company logo on a shirt) — it must be specifically required by the employer. Further, it is not enough that the clothing is not worn away from work — it must not be suitable for taking the place of regular clothing. For instance, a police uniform would not be suitable for general wear.
Protective clothing required for work is deductible, such as safety shoes or boots, safety glasses, hard hats and work gloves, the IRS states. Examples of workers who may be required to wear safety items are carpenters, cement workers, chemical workers, electricians, fishing boat crew members, machinists, oilfield workers, pipe fitters, steam fitters and truck drivers.
The IRS provides other examples of clothing costs that are and are not deductible, some of them shown in the chart below.
Examples of deductible and nondeductible clothing costs* Clothing worn by these workers is deductible Clothing costs that are not deductible
• Delivery workers • Firefighters • Health care workers • Law enforcement officers • Letter carriers • Professional athletes • Transportation workers (air, rail, bus, etc.)• Musicians and entertainers (theatrical attire)
• White clothing required of painters by the union • Standard work shoes • Blue clothing required of welders by foreman
*See IRS Publication 525 for information on military uniforms.
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SCORE No. 02437-161US CSG No. 1608-2012156 SWED None
This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.
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