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Disabled access credit available for tax-exempt entities.

The Revenue Reconciliation Act of 1990 added Sec. 44 to provide a credit for expenditures incurred by eligible small businesses that provide access to disabled individuals, as required by the Americans with Disabilities Act of 1990 (ADA).

Sec. 44 disabled access credit

The ADA mandates that businesses must modify their facilities to provide access for disabled persons. Although the ADA was passed in July 1990, the disabled accessibility requirements for public accommodations did not become effective until Jan. 26, 1992. For businesses with 25 or fewer employees and gross receipts of $1 million or less, the effective date was delayed until July 26, 1992; for businesses with 10 or fewer employees and gross receipts of $500,000 or less, the effective date is Jan. 26, 1993.

Many of the costs incurred in order to comply with the ADA may qualify for an income tax credit under Sec. 44. To qualify, an entity must be an "eligible small business." Under Sec. 44(b), an eligible small business is one that has either gross receipts from the preceding tax year of $1 million or less, or employed not more than 30 full-time employees during the preceding tax year. Sec. 44(b) defines a full-time employee as a person who is employed at least 30 hours per week for at least 20 calendar weeks (not necessarily consecutively) in the previous tax year. If one of the above requirements is met, Form 8826, Disabled Access Credit, is used to elect the Sec. 44 credit.

These expenditures must be reasonable and necessary (Sec. 44(c)(3)). Also, the modifications must meet the standards set forth by the Treasury Department in concurrence with the Architectural and Transportation Barriers Compliance Board (Sec. 44(c)(5)). Further, expenses incurred for handicapped accessibility for a building first placed in service after Nov. 5, 1990 (i.e., new construction) are not eligible for the credit (Sec. 44(c)(4)).

Qualifying expenditures ("eligible access expenditures") for the Sec. 44 credit include costs paid or incurred to remove architectural, communication, physical or transportation barriers. However, the credit is available for more than just construction costs (Sec. 44(c)). Expenses to provide interpreters, taped texts and other methods that effectively deliver material to visually and aurally impaired individuals also qualify.

There is an annual dollar limitation to this credit. The amount that can be claimed for any tax year is limited to 50% of the eligible access expenditures that exceed $250 but do not exceed $10,250 in that particular tax year. Thus, the maximum annual credit is $5,000. A suggestion would be to spread the cost of modifications over two years to double the amount of the Sec. 44 credit available.

Note that to avoid a double tax benefit, Sec. 44(d)(7) provides that 50% of the eligible access expenditures that give rise to a credit may not be deducted or added to the basis of property. For example, a taxpayer with $8,250 of eligible access expenditures can claim a Sec. 44 credit of $4,000 and either currently deduct $4,250 (if elected under Sec. 190) or add that $4,250 to the tax basis of the asset to which it relates.

If it is determined that a business qualifies for a Sec. 44 credit, the amount of the credit is combined with other credits that comprise the Sec. 38 general business credit. The general business credit claimed during a year cannot be in excess of the taxpayer's net income tax (including the alternative minimum tax) over the greater of the tentative minimum tax for the tax year, or 25% of the amount of the entity's regular tax liability that exceeds $25,000.

Application of Sec. 44

to tax-exempt organizations

Many tax-exempt organizations can satisfy the definition of an "eligible small business." Therefore, these organizations may qualify for the Sec. 44 credit, which can then be offset against the organization's unrelated business income tax (UBIT).

Many tax-exempt entities generate unrelated business taxable income (UBTI) on which UBIT has to be paid. UBTI is income generated from any business activity not substantially related to the organization's exempt purpose or function.

Under Sec. 38(a), the general business credit, which includes the disabled access credit (Sec. 38(b)(7)), may offset any tax imposed by Chapter I of the Code. The tax imposed by Sec. 511 on UBTI is a tax imposed under Chapter 1. Thus, if the limitations imposed by Sec. 38 are met, a general business credit can be taken to offset an exempt entity's tax on UBTI. The exempt entity would claim the disabled access credit in the same manner as other eligible taxpayers, by filing Form 8826 (and Form 3800, General Business Credit, on which the allowable general business credit is determined).

The disabled access credit is an advantageous means to have the U. S. Government pay for a portion of the costs incurred to modify a facility for access by the disabled. Care must be taken to ensure that the expenses qualify for the credit and consideration should be given to spreading these qualifying costs over two or more years. This could lessen or eliminate any tax on UBTI generated by a tax-exempt entity.
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Article Details
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Author:Smigelski, G. Todd
Publication:The Tax Adviser
Date:Dec 1, 1992
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