Section 44 Small Business Disability Access Credit Considerations

Many small businesses overlook the IRC Section 44 Small Business Disability Access Credit.

Essentially, Section 44 provides a credit for up to half of the costs to comply with the Americans with Disabilities Act (ADA). Maximum annual credit cannot exceed $5,000 and costs must exceed $250. Businesses that have revenues of less than $1 million or fewer than 30 full-time employees qualify for this tax credit. Most costs to purchase equipment or devices and to create or modify real or personal property are eligible for this credit if (1) they are reasonably necessary to comply with the ADA and (2) the primary purpose of complying with the ADA.

The Court of Appeals for the Fifth Circuit recently addressed Section 44 in Arevalo v. notary. The Arevalo case provides an example of when taxpayers should not try to qualify for the Section 44 tax credit and shows how the IRS addresses these tax credits.

Arevalo was another individual taxpayer who “invested” public phones with Alpha Telecom. Alpha Telecom intends to “sell” pay phones as “business opportunities” and at the same time, if the “business owner” agrees, Alpha Telecom essentially manages and operates the pay phones for the “business owner”. Courts have held that these transactions are “investments” and not “businesses.”

Arevalo had claimed a Section 44 tax credit on his 2001 personal tax return because Alpha Telecom’s pay phones were apparently modified to be ADA compliant. The US Tax Court and the Fifth Circuit (as did the Sixth Circuit with a different taxpayer) held that Arevalo was not entitled to the Section 44 tax credit.

In reaching this determination, the court held that (1) Arévalo was unable to show how funds were spent to make the pay phones ADA compliant, because Alpha Telecom apparently failed to disclose to Arévalo how the pay phones were ADA compliant. the ADA and (2) that the Section 44 tax credit is only available to the party that is subject to the ADA, which in this case was Alpha Telecom (and not Arevalo).

The court also denied Arevalo’s Section 167 depreciation deduction with respect to public telephones. In doing so, the court used the old “substance over form” analysis to show that Arevalo did not acquire enough property in the payphones for it to count as a business. If Arevalo were operating the pay phones, he would have been able to explain how the phones were modified to comply with the ADA and he would have been the person subject to the ADA.

The problem for taxpayers is that many common transactions could fall victim to this analysis, such as lease/sale agreements and even sale/consignment agreements.

Perhaps the lesson learned from the Arevalo case is that taxpayers should only claim the Section 44 tax credit (or even the Section 190 transportation and architectural barrier removal expense tax deduction) if they document the underlying transactions before filing. Form 8826. Attorney can help taxpayers in this regard.