Disabled access credit.

According to Chief Counsel Advice (CCA) 200411042, software expenses to improve access to a business website are ineligible for the Sec. 44(a) disabled access credit, because they do not meet a physical presence requirement. Further, annual software subscription costs are not eligible.

Law: Sec. 44(a) allows an "eligible small business" to claim a disabled access credit of 50% of the "eligible access expenditures" for the tax war that exceed $250 but not $10,250; thus, the maximum credit for any year is $5,000 (50% ($10,250-$250)). For this purpose, an eligible small business is any person (1) with gross receipts for the preceding tax year that did not exceed $1 million or (2) that did not have more than 30 full time employees during the preceding tax year.

Eligible access expenditures are amounts paid or incurred by a small business to comply with the applicable Americans with Disabilities Act of 1990 (ADA) requirements; see Sec. 44(c)(1). Under Sec. 44(c)(2), some of these expenditures include amounts to provide:

* Effective methods (e.g., qualified interpreters) of making aurally delivered materials available to hearing impaired individuals; and

* Effective methods (e.g., taped texts) of making visually delivered materials available to individuals with visual impairments.

Facts: In the CCA, developers created software that allows certain disabled individuals (e.g., hearing and speech impaired or visually impaired) to improve communication with a business. Several businesses that bought the software conducted business only via the Web. The developers claimed that using their software program made each business's website more accessible to disabled individuals and that the businesses would qualify for the disabled access credit. Some businesses paid the developers annual subscription costs for the software product and, thus, claimed the disabled access credit for multiple years.

Ruling: The CCA concluded that the software expenses the businesses incurred were not eligible access expenditures available for the disabled access credit. The ADA prohibits discrimination against those disabled in a "place of public accommodation"; see 42 USC Section 12182(b)(1). The CCA concluded that the majority of cases interpreting the ADA limit the term "place of public accommodation" to an actual physical structure. The CCA noted, a "nexus between the challenged service and the premises of a physical public accommodation is required." Thus, improved access to a website does not qualify. The holding presents a problem for small businesses that do business solely over the Web.

The CCA also stated that businesses claiming disabled access credits in multiple tax years for annual subscription costs were attempting to circumvent the Sec. 44(c)(1) limit that prevents a taxpayer already in compliance with the ADA from claiming the credit in a subsequent year for expenses to upgrade, improve or continue disabled access services. At the end of each year, the subscription termination would cause the businesses to fall out of compliance with the ADA and each business would purchase another annual subscription, thereby generating another $5,000 disabled access credit. The repeat expenditures were ineligible for the credit, because they were unreasonable and unnecessary to accomplish Sec. 44(c)(2) purposes.