In a costume rental business, where are the supplies for creating the costumes deducted? are they expenses, supplies, capital... ?

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Probably depends on bookkeeping setup. If you depreciate the finished costume as an asset the material ,decorations and labor other than your own would be the basis for valuation for depreciation 2-5 years.

However if you expense all as supplies and carry no inventory the costume would not have a cost basis.Which might be  unrealistic if most revenue comes from rentals.