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Evaluate the disability access tax credit

May 17, 2012

By J.R. Armstrong, CPA, and Jodi Permenter, CPA

The federal Americans with Disabilities Act (ADA) requires most businesses to make their services accessible to employees and customers with disabilities. To lessen the burden the act puts on small businesses, the Internal Revenue Service (IRS) created the Disability Access Credit.

However, widespread misinformation and abuse of the credit has made it subject to special scrutiny, and taxpayers must have adequate documentation to prove that they qualify.

In addition, even small businesses that do qualify for the credit may not see the tax benefit right away. In fact, as will be documented later in this article, claiming the credit could actually increase a tax bill in the current year!

However, the Disability Access Credit is a great opportunity for small business to afford to become ADA compliant, but be aware that not every expense that benefits the disabled is eligible for the tax credit.

The Disability Access Credit is available to businesses with fewer than 30 employees or less than $1 million in annual receipts. The credit is equal to 50 percent of the eligible expenses between $250 and $10,250, for a total possible credit of $5,000 each year.

However, eligible expenses are very narrowly defined in the tax code. In order to qualify, an expense must (1) “remove a barrier” which prevented a business from being accessible to, or usable by, disabled individuals, (2) provide effective methods of communicating with hearing or visually impaired individuals, or (3) acquire or modify equipment for use on disabled individuals.

While renovations to existing structures could qualify for the tax credit, the cost of constructing a new building will not.

All eligible expenses must be “reasonable and necessary” to comply with the Americans with Disabilities Act.

Soon after the creation of the Disability Access Tax Credit, salesmen began using it as a selling point for their products.

Across dozens of industries, sales representatives began advertising that the purchase of their equipment was eligible for the tax credit. In reality, eligible expenses vary for each business, and nobody can guarantee that purchasing a product will qualify the purchaser for the credit.

Instead of relying on such promises, it pays to ask two questions when considering whether a purchase is eligible:
1) Is the purchase for the primary purpose of complying with the ADA?
2) Is the expenditure necessary and reasonable to meet compliance with the ADA?
If the answer to both of these questions is “yes,” the purchaser is justified in taking the credit. However, even after meeting that basic criteria, the purchaser may find the qualifying for the credit remains something of “a gray area.” It is advisable to look to case law for additional guidance.

In Hubbard v. Commissioner 1, the taxpayer, an optometrist, claimed the tax credit for the purchase of an automatic refractor and a height-adjustable instrument stand that made the automatic refractor accessible to wheelchair-bound patients.

Prior to purchasing the automatic refractor, Dr. Hubbard used a manual refractor, behind which, as in most practices, the patient sat in an examination chair, viewed various charts through different lenses and answered a series of questions posed by the optometrist.

The year before purchasing the automatic refractor, Dr. Hubbard had to refer approximately 30 disabled patients to other optometrists because he could not ascertain subjective refractions. For example, some mentally handicapped individuals were unable to understand and answer the questions. Physically disabled patients could not be moved into the examination chair. Hearing-impaired patients found it difficult to write notes and look through the manual refractor simultaneously, leading to less accurate refractions.

The judge ruled that the credit was allowable because the purchase of the automatic refractor made Dr. Hubbard compliant with the Americans with Disability Act. The purchase of the automatic refractor removed a barrier that had previously prevented him from treating disabled patients. The judge also noted it was irrelevant that the taxpayer used the refractor on his nondisabled patients.

However, in Fan v. Commissioner 2 the taxpayer, a dentist, claimed the Disability Access Credit for the purchase of an intraoral camera and monitor. Dr. Fan purchased the camera, monitor, and accompanying educational information for general patient use. He regarded the purchase as an improved way to communicate with hearing-impaired patients.

Before making the purchase, he communicated with hearing-impaired patients through the use of hand-written notes. A judge disallowed the credit because Dr. Fan’s dentistry practice was already ADA-compliant. In the years leading up to the purchase of the camera, Dr. Fan had never refused treatment to a patient due to a hearing impairment, and he had never received any complaints from hearing-impaired patients about the quality of his communication.

The judge disallowed the credit, stating the purchase of the intraoral camera system “did not permit patients to be treated who were previously excluded from services.” In his opinion, the judge gave some insight into his reasoning. He said the camera system did not replace the handwritten notes, and that the system was not designed or marketed as a communication device for hearing-impaired individuals, therefore, it was not purchased primarily to become ADA-compliant.

Determining whether a practitioner qualifies for the credit is difficult enough, but, even if the practitioner does qualify, there is still a chance that the tax benefit might not be realized or that the tax benefit might not be seen for many years.

The Disability Access credit is a general business credit, and it is not allowable if the individual is subject to Alternative Minimum Tax (AMT). A taxpayer may carry the credit forward for 20 years, and claim it when no longer subject to the AMT. However, the depreciation deduction allowed on the equipment is reduced by the amount of the credit, which will increase current tax liability.

For example, suppose last year Dr. Smith made $250,000 in income and had $40,000 worth of itemized deductions, with $15,000 attributable to real estate taxes. With the given income and deductions, Dr. Smith is subject to AMT. He also purchased a piece of equipment for $8,500 that is eligible for the Disability Access Credit. The purchase qualifies for a credit of $4,125 (or 50 percent of $8,500 minus $250). However, because he is subject to the AMT, he cannot take the credit this year. Instead, it will carry forward for up to 20 years, until he is no longer subject to AMT. Even though he cannot take the credit this year, it will still affect the depreciable basis of the purchased equipment. The IRS requires the depreciable basis of the equipment must be reduced by the amount of the credit in order to prevent anyone receiving a “double benefit” from the purchase. In this case, only $4,375 (the $8,500 purchase price of the equipment, less the $4,125 tax credit) of the cost could be depreciated, effectively increasing Dr. Smith’s taxable income in the current year by $4,125. With a 33 percent tax bracket, his tax bill would increase by $1,361.

The Disability Access Credit is very complex, and can affect tax liability in unexpected ways. Before purchasing a piece of equipment that may qualify for the credit, it is important to speak to a tax professional. A competent accountant or tax preparer should be able to tell if a practitioner is subject to AMT, and, if so, when the practitioner may see the benefit of the credit. Don’t get caught in the Disability Access Credit trap! Careful tax planning can help avoid all of the pitfalls of the Disability Access Credit.

Armstrong is a partner in the firm of May & Company, LLP. Permenter is a member of the professional staff. The firm consults with ODs in 30 states, assisting with their tax planning and preparation, QuickBooks support, and business planning. May & Company has offices in Louisiana, Mississippi, and Alabama. Armstrong can be reached at 601-636-4762 or by email at jarmstrong@maycpa.com.

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