QUESTION: Our company is going to require some customer-facing employees to wear a uniform, which the company will provide without charge. Will we have to treat the value of that uniform as income for tax purposes? The clothes will carry our company logo, and there will be a strict rule prohibiting employees from wearing those clothes when they are not working or traveling to and from work.
ANSWER: Under general tax principles, the value of employer-provided clothing is a taxable benefit unless the clothing qualifies for an exclusion. Sometimes individual items of clothing, like T-shirts, can be excluded as de minimis fringe benefits, but that exclusion is unlikely to apply when a uniform is provided to a readily identifiable group of employees. A more likely basis for exclusion in your situation is the working condition fringe benefit exclusion under Code § 132(a)(3), which allows an employer to provide property or services to employees on a nontaxable basis if the expenses would qualify for a business expense deduction (under Code § 162) if the employees paid for them. Whether your company’s uniforms will qualify for that exclusion is uncertain based on the facts you’ve provided.
Code § 162 generally allows a deduction for “ordinary and necessary expenses paid or incurred…in carrying on any trade or business.” Required clothing might seem to fit that description, but the deductibility issue for clothing is complicated by another Code provision, Code § 262, which bars any deduction for “personal, living, or family expenses.” The IRS has attempted to reconcile these provisions by establishing a rule permitting deductibility, and thus a potential working condition fringe benefit exclusion, for clothing provided in-kind if the clothes (1) are specifically required to be worn as a condition of employment and (2) are not “of a type adaptable to general or continued usage to the extent that they take the place of regular clothing.” Sometimes, the second part of the rule is said to require clothing that is not “adaptable to street wear.” While the deductibility rule was adopted in response to questions about the uniforms worn by specific types of employees (including police officers, firefighters, and letter carriers), apparently it also applies to other kinds of clothing.
Otherwise ordinary clothing does not cease to be adaptable to street wear—and thus won’t be considered deductible or excludable—simply because it has a company logo, name badge, or other commercial writing, symbols, or patches. And whether particular employees would choose to wear the clothes off the job is irrelevant. Adaptability for personal or general use is judged objectively. Further, the clothes will not be deductible simply because the employer prohibits wearing the clothing away from work. There must be something about the clothes that makes them unsuitable for everyday use.
For more information, see EBIA’s Fringe Benefits manual at Sections VII (“De Minimis Fringe Benefits”) and XXIII (“Working Condition Fringe Benefits”).
Contributing Editors: EBIA Staff.
