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Complying with the Americans with Disabilities Act: costs and tax treatment.

The Americans With Disabilities Act (ADA) of 1990 was enacted to guarantee individuals with disabilities equal opportunity in employment, public accommodations, state and local government services, transportation and telecommunications. Many businesses must already comply or comply soon with the provisions dealing with employment and public accommodations.|1~ The employment requirements were effective on July 26, 1992, for employers with 25 or more employees and will become effective on July 26, 1994, for employers with 15 to 24 employees. The public accommodations requirements were effective in general on January 26, 1992. Businesses with 25 or fewer employees and gross receipts of $1 million or less had to meet the public accommodations requirements on July 26, 1992, while businesses with 10 or fewer employees and gross receipts of $500,000 or less must comply by January 26, 1993.

The costs of meeting the ADA requirements can be minimal but may, in some cases, be substantial. The purpose of this article is to provide an overview of the kinds of costs that may be incurred in complying with the ADA provisions and to explain how they will be treated for tax purposes. Two tax provisions that are especially helpful in reducing the net costs of compliance are analyzed.

Americans with Disabilities Act Requirements

The ADA employment provisions stipulate that employers may not discriminate against an individual with a disability in hiring or promotion if that person is otherwise qualified for the job. Employers must also provide reasonable accommodation to disabled individuals as long as the accommodations do not impose an "undue hardship" on the business' operations.|2~

An individual with a disability is defined as a person with a physical or mental impairment that substantially limits a major life activity such as seeing, hearing, speaking, walking, breathing, learning or working. A person who is considered to have a history of such an impairment and a person who is associated with a disabled individual are also covered under the ADA.

A reasonable accommodation is a modification to a job or work environment that will enable a disabled employee to perform essential job functions and ensure that he has the same rights in employment as a nondisabled employee. Reasonable accommodations can include modifying work schedules, acquiring or altering equipment or facilities, providing readers or interpreters, or modifying training programs.

An accommodation need not be made if it imposes an undue hardship on the operation of the business. Actions that would require a significant expense or pose substantial difficulty in relation to the size, resources, nature and structure of the business do not have to be made. The larger the entity, however, the greater the effort or expense that could be required.

Accommodations must be made on an individual basis and are not mandated if the individual does not request them. An employer is required to accommodate only a known disability.

The public accommodations provisions apply to private entities such as restaurants, hotels, retail stores, doctors' offices and day care centers. These businesses must remove physical barriers in existing facilities if removal can be carried out without much difficulty or expense. Installing ramps and removing high-pile carpeting are examples of removing barriers. If removal is not readily achievable, the business must offer alternative methods of providing the services. For example, if shelves in a store cannot be lowered, in-store assistance must be made available.

All new construction in public accommodations, office buildings and other commercial facilities that will have their first occupancy after January 26, 1993, must be made accessible. Alterations to these facilities must also be made accessible. Elevators are not required if the building is under three stories or has fewer than 3,000 square feet per floor unless the facility is a shopping center, mall or health care office.

As part of the public accommodations provisions, auxiliary aids and services must be provided to individuals with vision or hearing impairment or other disabilities unless an undue burden will result. Examples of aids and services include having information printed for deaf clients or supplying interpreters for the hearing impaired or readers for the vision impaired. Clients cannot be charged for the auxiliary aids or services. If a hotel offers transportation, it must provide equivalent transportation service to disabled individuals.

Costs of Complying with ADA

Businesses will incur a broad range of expenditures in meeting the American with Disabilities Act requirements. Although accommodations that will result in an undue hardship to the business are not required, the costs of reasonable accommodations may still be substantial. For Federal income tax purposes, the costs may be deductible, creditable and/or treated as an adjustment to the basis of an asset. The Federal tax provisions help to mitigate the financial burden of complying with the ADA.

Many of the costs incurred in complying with the ADA can be deducted from gross income in the year paid or incurred as an ordinary and necessary expense of the business.|3~ For example, the employment provisions stipulate that an employer may not inquire if someone has a disability. The costs of reviewing all employment applications to eliminate questions about physical or mental disabilities or the costs of altering tests that screen out people with disabilities are ordinary expenses and can be deducted in the year incurred. If an employer must provide a vision or hearing-impaired employee with a reader or interpreter, the costs can also be deducted in the year incurred as an ordinary and necessary expense.

Expenditures that are capital in nature or will benefit the business beyond the year in which they are incurred must be capitalized and depreciated (cost recovered) over the asset's useful life. For example, if a business purchases a special chair for a disabled employee, the cost would be recovered over seven years under the modified accelerated cost recovery system (MACRS).

Businesses can elect under Section 179 to expense up to $10,000 per year of new or used tangible personal property placed in service that year. Electing to expense the cost under Section 179 will result in an immediate tax savings rather than a tax savings that accrues over several years. For example, if a business spends $7,000 for a device that converts printed text into Braille, the $7,000 cost could be expensed in the year the device was placed into service instead of being capitalized and recovered under MACRS.

The $10,000 limitation is an annual limitation and does not apply to each asset placed in service that year. Therefore, if a business purchases several assets for more than $10,000, $10,000 can be expensed and the balance can be capitalized and recovered over the property's life. The taxpayer can choose which costs to expense.|4~

The Section 179 expense cannot exceed the amount of taxable income from the business. Any amount in excess of taxable income can be carried over to later years and deducted.|5~ If more than $200,000 of personal, tangible property is placed into service during the year, the $10,000 maximum deduction is reduced by the amount of property in excess of $200,000.|6~ As a result, only small businesses generally benefit from this elective provision.

Architectural and Transportation Barrier Removal Expense

The costs of removing architectural and transportation barriers are capital expenditures that normally result in an adjustment to the basis of the asset.|7~ A taxpayer may elect, however, to treat up to $15,000 of the removal expense as a deduction rather than a capital improvement.|8~ The costs that qualify for this election are only those directly attributable to the removal of an existing architectural or transportation barrier to make a facility or vehicle more accessible by a disabled or elderly individual. They do not include the costs of new construction or comprehensive renovation, but they do include the cost of constructing a ramp to remove the barrier caused by steps.|9~

Barrier removal costs for facilities such as buildings, structures, equipment, sidewalks, parking lots and similar property can qualify for the expense election.|10~ Examples of qualifying costs include making curb cuts, regrading land and widening a doorway. Costs incurred to remove barriers on vehicles such as a bus or van used to provide transportation to customers or clients of the business also qualify for the election.

Disabled Access Credit

Small businesses that incur costs to comply with the Americans with Disabilities Act may also qualify for a tax credit for the costs. An eligible small business is any person (sole proprietorship, partnership or corporation) that has gross receipts for the preceding taxable of $1,000,000 or less or who employs 30 or fewer full-time employees during the preceding taxable year. An employee is considered to be full-time if he works 30 hours or more per week for 20 or more weeks in the year.|11~

The credit is 50% of the eligible access expenditures for the taxable year that exceed $250 but do not exceed $10,250. The maximum credit for the year is $5,000.|12~ For example, if a business incurred $3,500 in costs to comply with the ADA, the credit would be $1,625 |.50 x ($3,500 - $250)~. The balance of any expenditures not taken as a credit can be expensed or capitalized and depreciated. For example, if a business spent $14,000 to erect ramps to make a building accessible, $5,000 of the cost would qualify as a credit. The $9,000 balance could be expensed as a barrier removal cost under Section 190 or capitalized and depreciated.

The disabled access credit cannot exceed the tax liability for the year, but any excess can be carried back three years and forward 15 years. The credit, however, cannot be carried back to a taxable year ending before November 5, 1990, the date of enactment of the ADA. The credit is claimed on Form 8826 and is subject to the general business credit limitations.|13~

The types of expenditures that qualify for the credit include amounts incurred:

* to provide visually impaired individuals with qualified readers, tapes or other methods of making visually delivered materials available;

* to provide hearing impaired individuals with interpreters or other methods of making orally delivered materials available;

* to acquire or modify equipment or devices or provide similar services to individuals with disabilities; or

* to remove architectural, communication, physical or transportation barriers that prevent a business from being accessible to disabled individuals.|14~

Only reasonable expenditures that are necessary to provide access will qualify for the credit. Any amounts incurred in connection with the new construction of a facility first placed in service after enactment of the ADA do not qualify.

The election to use the disabled access credit cannot result in a double tax benefit. Therefore, an amount used as a credit cannot also be taken as a deduction or treated as an addition to basis. For example, if a small business paid $10,000 for telecommunication devices for a deaf employee, $4,875 would qualify for the disabled access credit |.50 x ($10,000 - $250)~. The full $10,000 would not qualify for the Section 179 expense but $5,125 would qualify -- the portion of the cost that was not used as a credit.

In general, the disabled access credit will result in a greater tax benefit than expensing or capitalizing the cost since tax credits result in a dollar-for-dollar reduction in the tax liability and are not affected by the taxpayer's marginal tax rate. For example, if a sole proprietor in the 31% marginal tax bracket spent $10,000 to comply with the ADA and elected to treat the cost as a Section 179 expense, his tax savings would be $3,100, the 31% marginal rate multiplied by the expense deduction. If he used the disabled access credit and expensed the balance, his tax savings would total $6,464 |$4,875 credit + (.31 x $5,125)~.

Conclusion

Businesses will incur a wide range of costs to comply with the Americans with Disabilities Act. Although the Federal tax treatment of these costs will provide some relief, it will not eliminate the financial burden the Act imposes on businesses. Taxpayers should be aware that they can utilize more than one Federal tax provision to help minimize the after-tax costs of compliance.

References

1 The provisions dealing with telecommunications, state and local government operations, and transportation are not addressed here since they affect fewer businesses.

2 Americans with Disabilities Act Requirements Fact Sheet, U.S. Department of Justice, GPO 1990.

3 Code Section 162(a)

4 Reg. Sec. 1.179-1(b)

5 Code Section 179(b)(3)

6 Code Section 179(b)(2)

7 Reg. Sec. 1.190-1

8 Code Section 190(c)

9 Reg. Sec. 1.190-2(b)(1)

10 Reg. Sec. 1.190-2(a)(1)

11 Code Section 44(b)

12 Code Section 44(a)

13 Code Section 38(b)

14 Code Section 44(c)(2)

Hans J. Dykxhoorn, PhD, CPA, is professor of accountancy in the Haworth College of Business at Western Michigan University, Kalamazoo, Michigan. He has written numerous articles for professional journals, including the Accounting Review; Accounting, Organizations, and Society; and the National Public Accountant.

Kathleen E. Sinning, PhD, is professor of accountancy in the Haworth College of Business at Western Michigan University, Kalamazoo, Michigan. She is chairperson-elect of the International Section of the American Accounting Association and has published articles in number of journals.
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Author:Dykxhoorn, Hans J.; Sinning, Kathleen E.
Publication:The National Public Accountant
Date:Jun 1, 1993
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