If Your Job Requires It, Can You Deduct It?

I was recently talking with a friend about job opportunities available to him.

Some locations – like New York and L.A. – he dismissed immediately.

Then he mentioned that another location would require him to “suit and tie” every day.

I could not help but laugh. We both worked together in a mandatory “tie” environment, and I have worked in a mandatory “coat and tie” one. I suspect the latter is because the firm was downtown, and the firm wanted to project a certain image as its employees walked about. 

Still, suiting up gets expensive.

Sure would be nice if you could get a tax deduction out of it.

It’s almost impossible.

There is a famous case that laid down three requirements for clothing to be deductible:

(1) The clothing is of a type specifically required as a condition of employment;

(2) It is not adaptable to ordinary day-to-day wear; and

(3)  It is not used for day-to-day wear.

All in all, that seems to cover almost all clothing, unless you wear uniforms or are an astronaut.

But let me give you a few odd situations, and you tell me if there is hope of a tax deduction:

(1) You are a painter and are requested by the union to wear the traditional white-on-white painter’s outfit.

(2) You are a television news anchor and have to dress the part.

(3)  You are a Swedish rock band and wear clothing that looks like it has been dragged and ripped by wild dingoes.

(4) You are a musician and dress like a gypsy (or Welsh witch) for your performances.

There is a fellow who works for Ralph Lauren Corp. The company requires him to wear Ralph Lauren apparel while representing the company. As a consequence he has quite the extensive collection (and investment), and he tried to deduct some of it as a miscellaneous deduction on his Schedule A.

The Tax Court just said no dice. The clothing could be used day-to-day and therefore did not rise to the level of a deduction. The cost and restrictions imposed upon him by his employer were not tax relevant.

In truth, I wonder why he even pursued this matter. There is a case from before I came out of school where an Yves Saint Laurent employee tried the same deduction and failed.

Back to our examples:

(1) No deduction. The clothing could still be worn, although one is unlikely to do so. There may be an argument if the union required you to dress that way. The tax trigger would be more the requirement and less the clothing.

(2) Almost impossible. There is a case involving a news anchor with a wardrobe she considered too conservative for everyday use. She segregated it and wore it only at work. Not only did the Tax Court disallow the deduction, they also assessed penalties.

(3) This was the band ABBA, and they got the deduction. If you google their photographs, it is clear you would not wear that clothing outside of a performance or on Halloween.

(4) This was Stevie Nicks of Fleetwood Mac. She deducted over $40 grand on her 1991 tax return for costumes and hair styling. The IRS disallowed these and selected other deductions on her return. While the matter was docketed for Tax Court, it was returned to IRS Appeals. It was there resolved, and unfortunately tax practitioners (other than Stevie’s tax advisor) do not know how it turned out.

Then for the extreme tax athletes there is the woman who was able to deduct her body makeup, and I freely admit I am not sure what that is. She did not deduct clothing, as she wore none. She was an actress for the Broadway performances of Oh! Calcutta!

New Business Tax Provisions

So what are the key business tax changes from the American Tax Relief Act of 2012? Here are the ones that caught my eye:

(1)  Bonus depreciation extended through 2013.

The bonus allows one to immediately deduct 50% of the cost of qualifying assets.  If you buy a backhoe, for example, you can immediately expense one-half the cost – and you get to depreciate the remaining half.  

(2)  S corporation built-in gain tax recognition period

OK, this one is somewhat obscure. Suffice to say that a C corporation that switches to an S corporation cannot sell its business until after several years have run. It used to be that the period was 10 years, then reduced to 7 and then to 5 years. The Act extends the 5 years for sales through 2013.

What this is about is allowing tax planners to restructure businesses, or parts of businesses, for sale, in the hope of spurring – or at least not deterring – business and job activity.

 

(3)  Expensing for certain film and television activities

If Peter Jackson had filmed The Hobbit in the United States, he would have been able to expense the first $15 million in production costs. Three-fourths of the movie production must take place in the U.S.

The Act extends this break through 2013.

(4)  Increase in Section 179 expensing

Section 179 allows taxpayers to immediately expense equipment used in a business. Normally this type of expenditure would be depreciated over time (barring the bonus depreciation discussed in (1) above). Section 179 however has a limit on the amount that can be expensed and the amount of assets you can purchase and still qualify for the break.

In 2011 the amount that could be expensed was $500,000 as long as assets purchased did not exceed $2 million. That dropped to $125,000 and $500,000 for 2012. The Act retroactively changes 2012 to and sets 2013 at $500,000 and $2 million.

(5)  Faster depreciation of leasehold improvements

The Act extends the 15-year depreciation period for qualifying leasehold, retail and restaurant leasehold improvements.  

For example, the new Mad Mike’s at the Newport Levee would have been depreciated over 39 years. Now it can be depreciated over 15 years.

(6)  Research tax credit 

The Act extends the research credit through 2013.           

This credit is available for improvements in the production process as well as to the product itself. Think Apple and Pfizer.

(7)  Work opportunity tax credit 

This is the tax credit for hiring individuals on welfare, being released from prison, collecting social security disability and so forth.  

The credit is not insignificant: 40% of the first $6,000 in wages. 

Who is this credit important to? Think Cracker Barrel and ....

(8)  Veterans credit 

Technically this is a subset of the work opportunity credit from (7) above. 

Unemployed and disabled veterans are a qualifying category for the tax credit, although the credit amount can vary from $2,400 to $9,600 depending on how long the veteran has been unemployed and whether disabled. 

(9)  The Nascar loophole 

If you were thinking of building a “motorsports entertainment complex,” the Act will allow you to take accelerated depreciation. You have to build it soon, though.

 This one could not be more obvious if Jeff Gordon ran over you.           

(10)   Cover over of the rum excise tax 

There is an excise tax of $13.50 on every gallon of rum sold in the United States. That would normally be a business-breaker, but the government refunds almost all the tax - $13.25 – to Puerto Rico and the Virgin Islands in the form of economic aid. This is called the “cover over.” 

By far most of the money goes to Puerto Rico.

However... 

Do you know Diageo? They are based in London and produce  – among others - Captain Morgan rum. A few years ago, they moved their production of Captain Morgan from Puerto Rico to St. Croix, which is in the Virgin Islands. It seems that the USVI was able to provide a (1) 90% tax break, (2) a bigger kickback of the cover over, and (3) an exemption from property taxes.  

     

(11)    The “Subpart F active financing exception”

You ever wonder how a company like General Electric can pay no corporate income tax?           

Well, one way is that they lost a lot of money in previous years. This provision is another way.  

The U.S. (generally) considers interest earned by a U.S. corporation anywhere in the world to be a passive business activity. Makes sense, as accountants could easily move interest from country to country. By calling it passive, the goal is to make the interest taxable to the U.S. There are exceptions, of course, and this is one. 

This provision came into being in 1997 and with a significant amount of lobbying by General Electric. Why? Think G.E. Capital, and you are on the right track. It allows one to establish a captive finance company overseas, generate profits there but not pay taxes on the profits until the money is brought back to the U.S. 

This provision has been extended many times since 1997. It has now been extended again.