Tax Services for the Fashion Industry

Inventory Accounting for Fashion Brands

Inventory is where most fashion businesses either overpay on taxes or get into trouble with the IRS. The method you choose — FIFO, LIFO, or weighted average — changes how much cost of goods sold you can report and, by extension, how much profit you show on your return.

For most fashion brands, FIFO (first in, first out) is the default. But if your costs are rising — fabric prices up, manufacturing fees increasing — LIFO can produce a higher COGS and a lower tax bill. The catch: once you elect LIFO, switching back requires IRS approval, and there are conformity rules that affect your financial statements.

Dead inventory is the other issue. Those 200 units from last season that didn’t sell? You can write them down to their net realizable value (what you could actually sell them for, minus selling costs) and take the loss. We see brands sitting on tens of thousands of dollars in unsold goods and never writing any of it off.

Sales Tax on Clothing in New York

New York has one of the more favorable clothing sales tax rules in the country, and most fashion brands don’t fully understand it. Items of clothing and footwear priced under $110 per item are exempt from both New York State and NYC sales tax. That means a $95 dress? No sales tax. A $120 jacket? Full sales tax at 8.875%.

This gets complicated when you sell bundles, offer discounts, or do promotional pricing. If a $130 item goes on sale for $99, the exemption applies at the point of sale. But if you’re selling a $200 outfit as a “set”. And it includes items that individually would be under $110, you need to break them out or the whole set gets taxed. We set up your POS and e-commerce systems to handle this correctly from the start.

Multi-State Nexus and E-Commerce

Selling online means you’re probably collecting sales tax in more states than you realize. Since the Wayfair decision in 2018, most states impose economic nexus thresholds — typically $100,000 in sales or 200 transactions. If you hit those numbers in California, Texas, or Florida, you need to register and remit tax there.

For a growing fashion brand doing $500,000+ in e-commerce revenue, it’s common to have nexus in 10 to 15 states. Each one has different rates, different exemptions, and different filing frequencies. We map your nexus, register you where needed, and either handle the filings directly or integrate with your sales tax software (Avalara, TaxJar, etc.) to automate collection.

Deductions Specific to Fashion Businesses

Beyond standard business deductions, fashion companies have some industry-specific expenses that are fully deductible but frequently overlooked:

• Sample production — the cost of producing samples for buyers and lookbooks is a business expense, not inventory
• Showroom and trade show costs — booth fees at Coterie, MAGIC, or Capsule, plus travel and setup
• Photography and creative — model fees, photographer costs, and studio rental for product shoots and campaigns
• PR and influencer payments — gifting product to influencers is deductible at your cost basis, not retail value. Cash payments to influencers are deductible and require a 1099 if over $600
• Pattern-making and design software — CLO3D, Adobe Creative Suite and similar tools

Sources & References

• IRS Form 1040 Instructions
• 26 U.S.C. § 1 — Tax Imposed
• New York State Tax Rates