ADA compliance: let Uncle Sam help.

The provisions of the Americans with Disabilities Act (ADA) are complicated, and complying with them can be expensive--particularly for small businesses. Noncompliance may be even more costly: Fines are $50,000 for a first violation and $100,000 for a second violation. Income tax benefits, however, may lessen the financial burden for some companies and help them avoid fines. CPAs should be ready to advise clients on such benefits, which could help them pay the bill for needed changes.

PROTECTING THE DISABLED

When the ADA was signed into law in July 1990, its goals were to protect disabled persons from discrimination in the work place and to provide them access to public accommodations. Of the law's five titles, title I deals with equal employment opportunities and title III prohibits discrimination in public accommodations and services. Companies that adjust job policies to comply with title I or modify physical structures to accommodate disabled individuals under title III may be entitled to income tax benefits to cover at least part of the cost.

LET THE GOVERNMENT HELP PAY

Both tax credits and deductions are available to lessen the ADA's compliance burden on businesses.

Targeted jobs credit. One often-over-looked tax benefit for hiring the disabled is the targeted jobs credit. First enacted in 1979, it was renewed until December 31, 1994, by the Omnibus Budget Reconciliation Act of 1993. It is unclear if the credit will be extended again; the Clinton administration is working on a welfare reform plan that reportedly may not include a targeted jobs credit.

Internal Revenue Code section 51 allows employers a credit of 40% of the first $6,000 in "qualified first-year wages" paid to or incurred (accrued) by members of certain targeted groups. Section 51(d) lists 10 targeted groups, including "vocational rehabilitation referrals." Under section 51(d)(2), such individuals must be certified by a designated local agency, as defined in section 51(d)(15), as having

* A physical or mental disability that constitutes or results in a substantial handicap to employment.

* Been referred to an employer following completion of or while receiving rehabilitative services.

An employer's wage deduction must be reduced by the credit amount. Thus, an employer that pays a disabled employee $5,000 of qualified first-year wages will be allowed a tax credit of $2,000 and a $3,000 wage deduction.

IRC section 190 deduction. Enacted in 1976, section 190 was an early attempt to provide tax incentives for assisting the disabled. Section 190(a) allows taxpayers to elect to deduct immediately amounts paid or incurred for qualified architectural and transportation barrier-removal expenses for the disabled or elderly (those age 65 or older). (Normally, such expenditures are capitalized and depreciated.) The maximum deductible amount is $15,000. Excess expenditures must be capitalized and depreciated.

Architectural and transportation barrier-removal expenses are made to render a facility or public transportation vehicle owned or leased by the taxpayer for use in its trade or business more accessible to, or usable by, the disabled. A facility includes buildings, structures, equipment, roads, walks, parking lots or other similar real property.

Qualified expenses are made specifically to remove existing barriers. Such expenses are incurred, for example, to remove the barrier posed by steps to wheelchair users by constructing a ramp. However, they do not include amounts paid in connection with the construction or comprehensive renovation of a facility or public transportation vehicle or the normal replacement of depreciable property.

The Treasury regulations list 22 items that qualify as architectural and transportation barrier-removal expenses and give details as to what is needed for compliance. To qualify as a telephone barrier-removal expense, for example, a telephone must be placed so the dial and headset can be reached by an individual in a wheelchair, be equipped for those with hearing disabilities and have coin slots not more than 48 inches from the floor.

The standards that appear in the regulations were adopted from American National Standards Specifications for Making Buildings and Facilities Accessible to, and Usable by, the Physically Handicapped, published by the American National Standards Institute (ANSI) in 1971. The most recent ANSI guidelines were published in the Federal Register (36 Code of Federal Regulations part 1191) to illustrate ADA compliance requirements. Additional information is available from the Architectural and Transportation Compliance Board (telephone: [phone]).

These guidelines are more comprehensive than those in the Treasury regulations. For example, ANSI requires the cord from a telephone to its headset to be at least 29 inches long; this specification does not appear in the Treasury regulations. Therefore, complying with ADA guidelines should ensure deductibility under section 190.

One particular advantage section 190 affords is that additional depreciation on depreciable realty is not subject to ordinary income recapture. IRC section 1250(b)(3) exempts deductions taken under section 190 from the recapture rules. Thus, all amounts expended under section 190 on depreciable real estate are afforded capital gains treatment under IRC section 1231 when the property is sold.

The regulations say a section 190 election should be made by claiming the deduction as a separate item on the taxpayer's return; the return must be filed no later than the time prescribed by law (including extensions) for the taxable year for which the election applies. Taxpayers should attach a separate sheet to the return stating the election is being made and the cost of the items involved.

A section 190 election is irrevocable and must be applied to all qualifying expenditures up to $15,000. For example, a taxpayer with $20,000 of qualifying expenses must elect to expense the full $15,000. An election cannot be made for a lesser amount. Similarly, a taxpayer with only $6,000 of qualifying expenses must expense the full amount if the election is made.

Taxpayers making the section 190 election are required to keep adequate records and documentation, including architectural plans and blueprints, contracts and building permits.

Disabled access credit. IRC section 44, which accompanies passage of the ADA, provides that an "eligible small business" can elect a 50% credit for all "eligible access expenditures" exceeding $250 but not $10,250; the maximum credit is $5,000. The credit is computed on Form 8826, Disabled Access Credit, and the election is made by filing the form.

Section 44(b) defines an eligible small business as one that either has gross receipts (less returns and allowances) for the tax year preceding the year of the expenditures not in excess of $1 million or one that did not employ more than 30 full-time employees during the preceding tax year. Expenditures made in a business's first year presumably qualify. Full-time employees are employed at least 30 hours per week for 20 or more calendar weeks. Section 44(d)(4) says regulations will be issued to adjust the section 44(b) requirements to address new businesses whose preceding year is less than 12 months.

Section 44(c) defines eligible access expenditures as amounts paid or incurred by eligible small businesses to comply with ADA requirements. The term includes, but is not limited to, amounts paid or incurred to

1. Remove architectural, communication, physical or transportation barriers that prevent a business from being accessible to, or usable by, individuals with disabilities.

2. Provide qualified interpreters, taped tests or other effective methods of making aural materials available to individuals with hearing impairments.

3. Provide qualified readers, taped tests or other effective methods of making visual materials available to individuals with visual impairments.

4. Acquire or modify equipment or devices for individuals with disabilities.

5. Provide other similar service modifications, materials or equipment.

Expenditures must be reasonable and necessary. Section 44(c)(4) says eligible access expenditures described in item 1 above do not include amounts paid or incurred for a facility first placed in service after November 5, 1990, the date section 44 was enacted. Facilities constructed after that date are required to comply with the ADA. However, expenditures described in items 2 to 5 are not subject to this restriction. Future regulations will address the need for barrier removal to meet Treasury standards.

Section 44(d)(3) applies to partnerships. The credit limitation is applied to both the partnership and to partners. The same rule applies to S corporations and their shareholders. For example, if a partnership with three equal partners incurs $15,000 of eligible expenditures, only $10,250 can be used by the partnership. Each partner is allowed to take into account additional section 44 credits from other partnerships, S corporations or businesses he or she operates until the total reaches $5,000 for the taxable year. The total amount of credits must be reported by each individual taxpayer on his or her form 8826. The partnership also must file a separate form 8826 with its return. The $10,250 limit applies as well to groups of controlled corporations as defined in IRC section 52(a).

Section 44(d)(7) requires taxpayers electing the credit to reduce the property's cost basis by the credit amount. For example, if a company makes $9,250 in eligible expenditures, it qualifies for a $4,500 tax credit. The property's $9,250 basis must be reduced by the credit. The remaining $4,750 can be depreciated or may be eligible for an immediate deduction as a qualified architectural barrier-removal expense under section 190. In this example, the taxpayer is eligible to take any other available credits on the remaining $4,750. Similarly, amounts immediately deductible as ordinary expenses that qualify for the credit must be reduced by the credit amount. For example, if a business pays $4,250 for qualified interpreters it is entitled to a $2,000 tax credit. The remaining $2,250 is immediately deductible as an ordinary expense. (The normal deduction would have been $4,250, but $2,000 is lost because of the credit.)

Businesses can maximize their tax advantages when eligible access expenditures, which are spread over depreciable property that is immediately deductible, exceed $10,250 in one year. The exhibit on this page provides an example. This planning technique is feasible because neither the IRC nor the congressional conference committee report prescribes an order or allocation as to how the credit is to be applied when eligible access expenditures exceed $10,250. Presumably, an allocation can be made at the taxpayer's discretion.

A better planning technique is to spread eligible access expenditures in excess of $10,250 over more than one year. Taxpayers then can obtain more credits. For example, a taxpayer with $20,500 of eligible access expenditures can obtain a total of $10,000 in credits if it spends $10,250 in each of two separate years. If the taxpayer spends $20,500 in one year, only $5,000 of credits can be obtained.

IRC section 38 prescribes certain limits on the amount of general business credits, including the disabled access credit, that can be taken in a year. Under section 39, unused business tax credits can be carried back 3 years and forward 15 years. However, the disabled access credit cannot be carried back to years before November 5, 1990, when the ADA went into effect.

THE COST OF NONCOMPLIANCE

Complying with the ADA may be expensive. Failing to comply also is expensive. Available tax incentives for hiring the disabled and removing barriers can minimize some of the financial burden. Indeed, the tax savings may be the difference for many businesses that otherwise couldn't afford to make the changes.

Failing to comply with the ADA also can create legal problems. As an increasing number of CPAs do consulting work on ADA compliance, it's important to keep in mind that advising clients about tax and financial considerations is an important part of this work.

EXECUTIVE SUMMARY

* COMPLYING WITH THE Americans with Disabilities Act (ADA) is complicated and expensive--particularly for smaller businesses. Income tax benefits--in the form of deductions and credits--may, however, lessen the financial burden for some companies and help them avoid fines for noncompliance.

* AMONG THE TAX BENEFITS that businesses can take advantage of in complying with the ADA are the targeted jobs credit, deductions under Internal Revenue Code section 190 and the disabled access credit.

* THE TARGETED JOBS CREDIT is an overlooked tax benefit that allows employers a credit of 40% of the first $6,000 of qualified first-year wages paid to certain groups, including vocational rehabilitation referrals.

* IRC SECTION 190 ALLOWS taxpayers to deduct immediately the amounts paid or incurred for qualified architectural or transportation barrier-removal expenses for the disabled or elderly. Complying with ADA guidelines should ensure deductibility under section 190.

* THE DISABLED ACCESS CREDIT, IRC section 44, allows eligible small businesses a 50% credit for certain expenditures they make to improve employment access for the disabled.

* FAILURE TO COMPLY WITH the ADA can be costly. Fines for noncompliance are $50,000 for the first violation and $100,000 for the second.

Maximizing tax advantages from ADA expenditures

In one taxable year, company X spends $25,000 on ADA-related expenditures: $20,000 on depreciable items and $5,000 on immediately deductible items. All expenditures qualify for the disabled access credit. Company X can gain maximum tax benefits by

* First allocating the credit fully to the depreciable property.

* Deducting the remaining $15,000 of basis under section 190.

* Fully deducting the $5,000 allocable to deductible items.

If the company first allocates the credit to deductible items, it will have a $2,500 deduction ($5,000-$2,500 credit) and reduce its depreciable property by $2,500 because it will be forced to allocate $2,500 of the credit to the depreciable property. The deduction will be only $17,500 ($15,000 section 190 election and $2,500 of deductible expenses), and the remaining $2,500 will be subject to annual depreciation.