Complying with the ADA Can Provide Tax Benefits

In 1990, Congress passed the Americans with Disabilities Act (ADA). Since then, many improvements have been made by businesses in providing access for individuals with disabilities; however, full access has not yet been achieved. Compliance with the ADA can be costly for a business; many business owners are reluctant to make the necessary improvements, as they perceive the economic rewards to be insufficient. However, to encourage compliance with the ADA and to spur access improvements, Congress has made relief available to businesses, through the use of tax incentives provided in Secs. 44 and 190.

Sec. 44—Disabled Access Credit

To encourage small businesses open to the public to comply with the ADA, Sec. 44 was enacted in 1990. This section makes available a nonrefundable tax credit to eligible small businesses that incur ADA-related expenses to comply with providing access to persons with disabilities. An "eligible small business" is any business or person that had no more than 30 full-time employees during the preceding tax year or gross receipts not exceeding $1 million in the preceding tax year. Eligible access expenditures include amounts paid or incurred in the current tax year, for items such as (1) the removal of barriers that prevent a business from being accessible, (2) providing assistance for visually or hearing-impaired individuals and (3) acquisition or modification of equipment or devices for individuals with disabilities.

Sec. 44 allows an eligible small business to claim a credit of 50% of the eligible access expenditures over $250, not to exceed $10,250 in any tax year; thus, the maximum Sec. 44 credit is $5,000. The credit is calculated on Form 8826, Disabled Access Credit, and is part of the general business credit. Any costs in excess of the $10,250 may qualify for the Sec. 190 deduction or can be capitalized under normal depreciation rules. However, to prevent a double benefit, no deduction or credit is allowed for any amount used under Sec. 44. In addition, the disabled access credit can be carried forward for 15 years and carried back for three years.

Sec. 190—Deduction for Removing Barriers to the Disabled and Elderly

This deduction is available to all businesses that make their facilities more accessible and usable for persons with disabilities or the elderly. Usually, the cost of improving a business asset is a capital item. However, Sec. 190 permits a taxpayer to currently deduct the costs of improvements that qualify as architectural and transportation barrier removal expenses, in the tax year paid or incurred. For an expense to qualify, the taxpayer must show that the expenditure meets IRS rules. The expense must be attributable to the removal of an existing barrier; the Service does not permit a deduction for new construction, the comprehensive renovation of a facility or the normal replacement of depreciable property. A "facility" is considered all or any part of a building, equipment, road or walkway, parking lot or similar real or personal property. The deduction limit is $15,000 per year; any costs in excess are capitalized and subject to normal depreciation rules. The $15,000 limit also applies to a partnership and, more importantly, to each partner in the entity. Typical real property qualified expenses include grading walkways, providing designated parking spaces, building accessibility ramps, and making doors and doorways wheelchair-accessible; various personal property improvements, such as wheelchair-accessible restrooms, water fountains, public telephones and elevators, also qualify. The key to the deduction is that the removed barrier must have been a substantial barrier to access or use of the facility by a person with disabilities or the elderly.

Example 1: Business B plans to renovate a set of restrooms to comply with the ADA. The project includes widening doorways, increasing restroom stall size and lowering sinks and drinking fountains to accommodate wheelchairs. The estimated cost of the project is $30,000. B is in the 34% marginal tax bracket and had fewer than 30 employees in the preceding tax year. It thus qualifies for the Sec. 44 credit as an eligible small business. Its treatment of the costs would be:

1. The first $250 does not qualify for the Sec. 44 credit.

2. The next $10,000 would qualify under Sec. 44. B's tax liability would decrease by $5,000.

3. The next $15,000 would qualify for the Sec. 190 deduction and decrease B's tax liability by an additional $5,100.

4. The remaining $4,750, plus the first $250 of expenditures, would be capitalized and depreciated over their tax lives.

As a result of the Sec. 44 and 190 tax incentives, B has gained an immediate tax benefit of $10,100, thus recovering approximately one-third of the project cost.

Planning to Increase the Tax Benefit

Near the end of the calendar year (which is the tax year-end for many small businesses), there are planning opportunities that can increase Sec. 44 and 190 tax benefits. By careful planning, management can phase in a project so as to maximize the tax benefits during the current and subsequent tax years.

Example 2: The facts are the same as in Example 1, except that B has decided to widen the doorways and increase the restroom stall size (at a cost of $20,000) during the current tax year. However, management has decided to postpone the $10,000 expenditure for lowering the sinks and drinking fountains until the subsequent tax year. The treatment of the costs would be:

1. The first $250 again does not qualify for the Sec. 44 credit.

2. The next $10,000 would qualify for the Sec. 44 credit and B's tax liability would decrease by $5,000.

3. Because the remaining $9,750 would again qualify for the Sec. 190 deduction, B is able to further reduce its tax liability by $3,315.

4. The following year, the first $250 does not qualify for the Sec. 44 credit.

5. The balance of $9,750 would qualify for the Sec. 44 credit, resulting in a subsequent-year tax decrease of $4,875.

6. The first $250 of expenditures in each tax year would be capitalized and depreciated.

As a result of Secs. 44 and 190 and some planning, B gained an immediate tax benefit of $13,190 (an increase of almost $3,100), resulting in an immediate recovery of almost 44% of the total project cost.

In the 10 years since Congress passed the ADA, many business owners have been reluctant to make the necessary improvements, because the economic rewards are falsely perceived as insufficient. However, as shown, Secs. 44 and 190 can provide some measure of relief to businesses, if properly used.

From Irwin Kravetzky, CPA, Ehrenkrantz Sterling & Co., Livingston, NJ