The Americans with Disabilities Act.

The Americans With Disabilities Act of 1990 (ADA), fully effective during 1992, will have a profound impact on the tax advice accountants give to their clients.

Tax provisions related to individuals

Disability-related deductions are allowed either as medical expense deductions or miscellaneous itemized deductions. There are opportunities to make elections for alternative treatment of some items in either category. A recommended way to get maximum tax benefits from elective items is to first evaluate the items for eligibility, and then follow Flowchart I, on page 599, to maximize the tax benefits. Some deductible items are eligible for treatment as medical expenses, while other items are deductible as "work related expenses"; many of these are deductible in either group (at the taxpayer's election). Careful classification assures the best tax treatment. Flowchart I shows the effect that alternative classifications can have on tax benefits. Example 1 illustrates the use of Flowchart I to maximize tax benefits for a disabled individual.

Example 1: Individual B is hearing impaired, single unemployed at age 50. B itemizes her deductions and paid the following: $700 for a hearing-aid animal to help her at home; $450 for a special telephone; $300 for a closed caption TV decoder; and $1,200 to assistance providers on special occasions. These items qualify as deductible medical expenses, but their total amount ($2,650) plus B's other medical expenses are less than 7 1/2% of her adjusted gross income (AGI). Therefore, the medical deduction floor prevents her from using them to reduce taxable income. If 6 were employed using her telephone for employment-related conversations and paying the assistance provider for sign language interpretation for her work, $1,650 of her medical expenses could be reclassified as employment-related work expenses of a disabled person. These would deductible in full as miscellaneous itemized deductions not subject to the 2% floor. The alternative classification would reduce B's tax by $462 (assuming a 28% tax rate) and could provide similar benefits for other (state and local) income taxes that are based on Federal taxable income.

Tax provisions related to businesses

Both deductions and credits are available to businesses. The provision for barrier removal expensing (Sec. 190) was in effect long before the enactment of the ADA. Available tax credits include the targeted jobs credit and a new "small business credit" authorized by companion legislation to the ADA.

Sec. 190 permits taxpayers to elect to treat qualified barrier removal expenses as a deduction (up to $15,000 annually), rather than as chargeable to a capital account and depreciated. However, this treatment is permissive, and provides planning options to defer tax benefits or use them currently. Sec 190 is linked with Sec. 1250)b)(3), providing relief from depreciation recapture when a depreciation deduction was taken for expenditures qualifying for Sec. 190 treatment. In that event, the qualified amounts are not required to be included in the amount recaptured as ordinary income under Sec. 1250.

Congress passed the Sec. 44 tax credit in response to the immediate needs to the ADA (effective after Nov. 5, 1990). The credit is available to "small businesses" (with not more than 30 employees or $1 million in annual gross receipts) and is a nonrefundable credit of up to $5,000 for qualified expenditures. The rules call for a credit for up to 50% of qualified expenditures over $250, but not to exceed $10,250 (($10,250 -- $250) X 50% = $5,000 total credit).

The small business credit applies to expenditures for Sec. 190 barrier removal and also applies to the following employment-related provisions of the ADA.

* Providing interpreters or other assistance to disabled workers.

* Purchasing equipment to assist disabled workers.

* Providing services or materials for disabled workers. When expenditures are carefully analyzed, the most beneficial rules can be applied first. As the limitation for each category is reached, the next most beneficial treatment would kick in. The business tax treatment flowchart (Flowchart II, on page 600) shows how tax benefits increase as each tax benefit provision is applied sequentially. These principles are also illustrated by the following example.

Example 2: W Corp. has current year ADA-related expenditures of $5,250 for a special computer required by a handicapped employee and $45,000 for barrier removal to accommodate disabled customers. If W capitalized these costs, it would reduce its tax liability by $819 (the modified accelerated cost recovery system (MACRS) applied to both items, assuming a 34% tax rate). However, by following Flowchart II, W maximizes its tax benefits. First, W uses the $5,250 of computer costs and $5,000 barrier removal costs for a total of $10,250 and a Sec. 44 credit of $5,000. Then W applies Se. 190 expensing to $15,000 of the remaining $40,000 barrier removal costs for a reduction in tax liability of $5,100 ($15,000 x 34% tax rate). The remaining $25,000 barrier removal costs are capitalized and the MACRS deduction is $761 for a tax savings of $259 (at 34%). By maximizing Sec. 44 and Sec. 190 benefits, W reduced its tax liability by $10,359 ($5,000 from Sec. 44, $5,100 from Sec. 190, and $259 from MACRS) compared with $819 generated by MACRS alone.

Tax planning opportunities

There are several ADA-related tax planning opportunities for individual taxpayers and businesses. Bunching of medical expenses for disabled individuals is one method of overcoming the 7 1/2%-of-AGI floor. Alternatively, proper classification of expenses can allow some amounts to be shifted to miscellaneous itemized deductions and avoid the floor altogether. Taxpayers with disabled dependents may elect to use certain expenses as either deductible medical expenses, or as qualifying payments for the child and dependent care credit, whichever is most beneficial.

Sec. 190 expensing and the Sec. 44 small business tax credit are both annual elections. This means that each can be applied annually to expenses for each tax year. Therefore, whenever possible, expenditures that qualify should be planned to use the full benefit of each for each tax year. Timing is also a consideration in making the election to use Sec. 190 expensing or defer tax benefits using the rules in Sec. 1250.

A unique planning opportunity applies to the employment-related provisions of the ADA. Employers may be required to provide assistance providers for disabled employees. For example, employers can be required by ADA rules to provide readers for blind employees or signers for hearing impaired workers. This can add considerably to employment fringe benefit costs if new employees are added for this purpose. An alternative approach would be to provide sufficient compensation to the disabled workers to allow them to provide these services for themselves at their own expense and under their own control. This eliminates the employers' fringe benefit costs related to hiring assistance providers. Furthermore, it should not burden the disabled worker because the full cost of the assistance provider is wholly deductible as an employment-related worker's expense.

Conclusion

The ADA requires a fresh look at the tax implications for disabled and handicapped person, their employers and the businesses that serve them. Individuals and businesses have certain elections to make as well as planning opportunities. There are alternative treatments to consider. These are some real opportunities that can reap significant benefits for tax professionals and their clients.