Are you confused about if clothing is a business expense? If so, don't get discouraged as the deductibility of clothing remains a gray area of CRA regulation. As a business owner, you want to be taking all deductions available to reduce taxable income and corresponding taxes, making it vital to understand what makes a qualifying business expense and the specifics of writing off clothes.
What Is a Qualifying Business Expense?
The Canada Revenue Agency classifies expenses into two different categories: a current year expense or a capital expense. The CRA defines a current expense as one that reoccurs for a short period, such as advertising for a new product or uniforms for your company. On the contrary, a capital expense provides lasting benefits, such as siding your clothing store's building (CRA).
Most current year expenses you incur will fall under the operating expense category, which includes your basic costs, such as bank charges, insurance, and rent. The expense must relate directly to your business and not be for personal use to be qualifying.
When Does Clothing Qualify?
Clothing qualifies as a write off in a few different scenarios. First, businesses that are centered around generating revenue from clothing are able to take a deduction. For example, a boutique who orders clothing to sell would classify these expenses as cost of goods sold, resulting in a full deduction. Any manufacturer, supplier, or business owner that sells clothing for a profit can deduct clothing expenses.
In addition, purchasing clothing for your employees to wear, such as a uniform, is also a qualifying business expense. Keep in mind that if employees pay for these items, you aren't able to take a deduction since that would be double-dipping. However, if you provide these items as a benefit, you might need to include the amounts as a taxable fringe benefit when issuing year-end payroll forms. Business merchandise falls under the same rules.
When Does Clothing Not Qualify?
Clothing does not qualify if it's for personal use. For example, purchasing a piece of clothing to wear to a meeting or seminar is not a qualifying expense. This is where the gray area comes into play. If you are a sole trader and purchase clothing for use directly in your business, it may qualify as a deduction. One example of this is a personal trainer. These professionals must generally wear athletic clothing to work, thus creating a business deduction if they retain sole trader status. Nevertheless, most business owners who run a partnership or corporation won't be able to deduct these expenses.
Deciphering the deductibility of clothing in your business is crucial to properly reporting expenses. There are many gray areas in the rules the CRA imposes, making it a great idea to contact a professional that can walk you through the specifics related to your situation. For more information, reach out to a team member today. We prepare CPA compliant compilation year end financial statements, offer full bookkeeping services on all leading accounting software platforms, personal and corporate income taxes, or GST/HST and provincial sales taxes. In short, we do it all! No matter what province or territory you reside in. Please contact us with any question you may have regarding our services. Our goal is to answer your concerns within one business day.
CRA. "Current or capital expenses." CRA, 8 Mar 2022, https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/business-expenses/current-capital-expenses.html. Accessed 8 Sep 2022.