Not all expenditures to aid the disabled qualify for credit. (Credits Against Tax).

The disabled access credit provides a tax incentive for small businesses to make improvements to enable disabled patrons to more easily access their business premises. The credit largely covers expenditures that arise under the Americans with- Disabilities Act of 1990 (ADA). To be eligible, a taxpayer must be a small business, defined as either having gross receipts in the previous tax year of not more than $1 million or employing not more than 30 employees.

Basically, a taxpayer may take a credit equal to 50% of the eligible expenditure. The first $250 of the expenditure is not eligible, as well as costs exceeding $10,250. The credit lowers the cost basis of the capital item, such that the remaining costs of the item may still be deducted as depreciation expense. For example, if a taxpayer in the 30% tax bracket makes a $10,250 eligible expenditure, the government effectively pays for $6,575 of the cost of the item through tax credits and tax deductions. A $10,250 eligible expenditure (the maximum amount) would generate a $5,000 tax credit and a further depreciation deduction of $5,250 ($10,250 cost -- $5,000 credit). With a 30% rate, the total tax benefit would be $6,575 ($5,000 tax credit + $1,575 ($5,250 x 0.30) depreciation expense), a 64% tax benefit.

The tax credit is calculated on Form 8826, Disabled Access Credit. Eligible items include costs incurred to:

1. Remove barriers that prevent a business from being accessible to (or usable by) individuals with disabilities;

2. Provide qualified interpreters or other methods of making audio materials available to hearing-impaired individuals;

3. Provide qualified readers, taped texts and other methods of making visual materials available to individuals with visual impairments; or

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

While not challenging many expenditures meeting the first criterion, the IRS has taken a stricter view of the fourth criteria. The issue has arisen when several companies that market medical devices for healthcare providers touted the credit as a benefit for purchasing their products. They argued that, because their medical products were designed to be accessible by individuals with disabilities, the full price of the product met the requirements for the credit. The Service has taken a dim view of their claim and has addressed the issue of eligible expenditures in two rulings. Although these rulings are only applicable to that taxpayer and may not be cited as precedent, they do indicate that the Service is taking a tough stance on eligible expenditures.

In Letter Ruling 9716009, a dentist wanted to use the credit for the purchase of a digital radiography (DR) machine. Although the machine would be used for all patients, it had many benefits over other similar equipment. The machine allowed for the generation of enhanced radiographic pictures of patient teeth that could better be viewed by patients with impaired vision. In the ruling, the IRS stated that a "patient who may have difficulty viewing a traditional dental x-ray is not discriminated against merely because DR equipment is not available. You believe that such a patient can still effectively communicate with the dentist about the patient's dental condition by speaking with the dentist or by viewing the x-ray with a magnifying glass." The ruling also stated that the general benefit of the equipment accrues to the dental practice and "to all patients with an ancillary benefit to the visually impaired individuals." Thus, the Service ruled that the equipment did not meet the credit's eligibility criteria.

In Letter Ruling (TAM) 200031001, an optometrist purchased a Humphrey Field Analyzer that sits on a variable-height table. The table is specifically designed to accommodate wheelchair-bound patients, as well as other patients. The optometrist also purchased a hand-held topographer that can be used for treating patients at remote locations like a nursing home and for wheelchair-bound patients. In the TAM, the IRS stated the "equipment has a general applicability and usefulness to all patients, disabled or non-disabled. The primary benefit of the equipment is to Taxpayer in his practice, although there may be incidental benefits to disabled patients."

In both instances, the Service stated that if the equipment is for all patients and not primarily handicapped patients, the credit is not applicable. Put simply, the IRS is taking a hard line on use of the credit for costs that meet only the fourth criteria. While a ramp designed to allow wheelchair access to a business is eligible for the credit (without regard to whether the majority of users are disabled or simply prefer walking up a ramp instead of stairs), expenditures for medical equipment must be used primarily for disabled patients to be eligible. The Service has made the distinction that "the ADA requires that architectural modifications providing access to disabled individuals must be made to places of public accommodation where such access does not already exist." However, "the ADA requires doctors to make their professional services available to disabled individuals through reasonable modifications to existing practices or procedures if necessary to avoid discrimination. Acquisitions of equipment of general applicability are generally acquisitions of equipment in the normal course of business rather than reasonable modifications of existing practices for ADA compliance." Currently, there is relatively little case law to challenge (or support) the IRS's position, but taxpayers should exercise caution when using the credit.

FROM MARC I. LEBOW, CPA, PH.D., ASSOCIATE PROFESSOR OF ACCOUNTING, AND WAYNE M. SCHELL, CPA, PH.D., ASSOCIATE PROFESSOR OF ACCOUNTING, CHRISTOPHER NEWPORT UNIVERSITY, NEWPORT NEWS, VA, AND P. MICHAEL MCLAIN, CPA, DBA, ASSISTANT PROFESSOR OF ACCOUNTING, HAMPTON UNIVERSITY, HAMPTON, VA (NONE ASSOCIATED WITH AFAI)