Section 44 Small Business Disability Access Credit Considerations
Many small businesses ignore the IRC Section 44 Small Business Disability Access Credit.
Essentially, Section 44 provides a credit for up to half of the costs of complying with the Americans with Disabilities Act (ADA). The maximum annual credit cannot exceed $5,000 and expenses must exceed $250. Businesses that have less than $1 million in revenue or less than 30 full-time employees are eligible for this tax credit. Most expenses to purchase equipment or devices and to create or modify personal or real property are eligible for this credit if (1) they are reasonably necessary to comply with the ADA and (2) the primary purpose is ADA compliance.
The Fifth Circuit Court of Appeals recently considered section 44 in Arevalo v. Commissioner. The Arevalo case provides an example of when taxpayers should not try to qualify for a Section 44 tax credit and shows how the IRS approaches these tax credits.
Arevalo was another individual taxpayer who “invested” payphones with Alpha Telecom. Alpha Telecom claims to “sell” payphones as “business opportunities” and at the same time, if the “business owner” agrees, Alpha Telecom essentially manages and operates the payphones for the “business owner”. Courts have ruled that these transactions are “investments” and not “businesses.”
Arevalo claimed a Section 44 tax credit on his 2001 personal tax return because Alpha Telecom phones were apparently modified to be ADA compliant. The US Tax Court and the Fifth Circuit (just as the Sixth Circuit did with another taxpayer) ruled that Arevalo was not entitled to the Section 44 tax credit.
In reaching this determination, the court held that (1) Arevalo could not show how funds were expended to make the payphones ADA compliant because Alpha Telecom clearly did not disclose to Arevalo how the payphones were ADA compliant and ( 2) that the Section 44 Tax Credit is only available to the party subject to the ADA, which in this case was Alpha Telecom (not Arevalo).
The court also disallowed Arevalo’s section 167 depreciation deduction with respect to the telephones. In doing so, the court used the old “substance over form” analysis to show that Arevalo did not acquire enough of the payphone ownership to be considered a business. If Arevalo operated the payphones, he would be able to explain how the phones were modified to comply with the ADA, and he would be the person subject to the ADA.
The problem for taxpayers is that many common transactions can fall victim to this analysis, such as lease/sale agreements and even sale/consignment agreements.
Perhaps the lesson learned from the Arevalo case is that taxpayers should claim a Section 44 tax credit (or even a Section 190 architectural and transportation barrier removal tax deduction) only if they document the underlying transactions before filing a form 8826. experienced tax attorney can help taxpayers in this regard.
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