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Tax savings for ADA compliance

Management | March 1, 2008 | By:

It has been 17 years since the Americans with Disabilities Act (ADA) was signed into law. Although many specialty fabric products businesses still fall short when it comes to making their businesses—and their business premises—ADA compliant, others have used the financial and tax incentives created to help ease the cost of complying with the ADA to improve and expand their businesses. With the U.S. Department of Justice cracking down on compliance, now might be a good time to explore how those incentives can help your business profit.

The ADA is a federal law that prohibits discrimination against individuals with physical handicaps, including hiring practices and design of buildings intended to serve the public. If a business is open to the general public, or operates an office, store, plant or facility where employees work, the owners are legally obligated to make the premises accessible to individuals with disabilities.

There are many examples of professionals and businesses acquiring special equipment to enable them to serve, or better serve, those people that the ADA was designed to help. Planning is essential.

A dentist claiming that his practice was better able to serve patients with disabilities thanks to the purchase of a new X-ray machine unfortunately failed to document that the purchase was specifically intended to make his practice ADA-compliant. An optometrist’s purchase of an automatic refractor, on the other hand, qualified as a “reasonable modification to a facility to provide services to individuals with disabilities.” Prior to the purchase, the optometrist had been forced to turn away individuals with disabilities. The U.S. Tax Court approved the equipment even though patients without disabilities could also use the refractor.

Becoming an accessible business

There are number of tax breaks available to qualified operations to adapt their business premises or acquire equipment that will help them become ADA-compliant. Best of all, many of those same tax breaks can help slash the cost of other equipment and property acquired.

Under our federal tax laws, an eligible specialty fabrics business is entitled to a unique tax credit for expenditures incurred to make a business accessible to individuals with disabilities—both customers and employees. And, as mentioned, those tax breaks are not limited to making a doorway wheelchair accessible.

A “qualified small business” is an operation that had gross receipts of $1 million or less, or one that did not employ more than 30 full-time employees in the preceding tax year. The amount of that tax credit, the disabled-access credit, is 50 percent of the amount of one year’s eligible access expenditures that are more than $250 but less than $10,250. The maximum credit (the amount by which the annual tax bill will be reduced) is $5,000.

To qualify for the credit, the expenses must be incurred to meet requirements established as part of the Americans with Disabilities Act of 1990. A business can claim the credit for the following costs:

  • Removing architectural, communication, physical or transportation barriers that prevent a business from being accessible to, or usable by, individuals with disabilities;
  • Providing qualified interpreters or other effective methods of making orally delivered materials available to individuals with hearing impairments;
  • Providing qualified readers, taped texts and other effective methods of making visually delivered materials available to individuals with visual impairments;
  • Acquiring or modifying equipment or devices for individuals with disabilities; or
  • Providing other similar services, modifications, materials or equipment.

Removing accessibility barriers

The ADA requires businesses open to the public to remove accessibility barriers regardless of when the facility was built. This is a proactive requirement that is not limited to capital improvements or remodeling.

An ADA survey conducted by a professional can reveal existing accessibility barriers, helping business owners and managers to understand their exposure and take steps to remediate barriers. An ADA survey could also be required as part of a settlement with the Department of Justice if a claim is brought against a business.

On the plus side, being proactive in conducting an ADA survey may help avoid future lawsuits from customers, or employees. In the past, the Department of Justice has ruled favorably on companies that can demonstrate a track record of trying to remove ADA barriers. In most cases, the cost of remediation is far less than the legal and settlement costs associated with a claim.

Section 179: additional deductions

The costs of making a business ADA compliant frequently exceed the amounts qualifying for the limited disabled access tax credit. An expense deduction—in other words, an immediate write-off—is available for the cost of newly acquired equipment and property, called Section 179 property.

In lieu of depreciation deductions spread out over a number of years, our tax rules allow fabricators with sufficiently small amounts of annual investment to deduct (or expense) those equipment and property acquisitions under Section 179 of the tax law. In general, lawmakers (and the IRS) describe property qualifying for this immediate deduction as “depreciable tangible personal property purchased for use in the active conduct of a trade or business.”

Almost every tax law change in recent years has tweaked small business expensing under the Tax Code’s Section 179. The 2007 Small Business Tax Act is no exception, increasing both the dollar amount and investment limitation.

Under the new law, the base $100,000 limit ($112,000 as indexed for inflation) increased to $125,000 for tax years 2007 through 2010. The maximum deduction is phased out by the amount by which all qualifying property placed in service during the tax year exceeds the investment limitation.

The investment limitation for property placed in service in tax years beginning in 2007 was $400,000, as indexed for inflation. The new law retroactively raises the investment limitation to $500,000 for tax years 2007 through 2010. That $500,000 amount is also indexed for inflation in tax years beginning after 2007 and before 2011.

Naturally, expenditures claimed for the disabled access tax credit cannot also be a Section 179 write-off. However, the balance is usually depreciated over a number of years. Or, those amounts may be claimed as an immediate deduction or write-off under Section 179.

To qualify as Section 179 property, the equipment or property must be tangible Section 1245 property (new or used), depreciable and acquired in the active conduct of a trade or business. Air conditioning and heating units are specifically excluded as Section 179 property.

Getting more from the tax break

Thanks to the new tax law changes, business owners and managers no longer face the uncertainty of a tax deduction that might or might not be around tomorrow. Fortunately, the significantly more generous tax break is not only extended through 2010, it is also indexed for inflation.

Remember, however, that while your business can spread out equipment purchases over the next few years because it is no longer necessary to cram all purchases into 2007, the deduction is completely phased-out under the new levels for qualifying purchases above $625,000.

And, you must also decide whether this first-year expensing election for newly acquired equipment will benefit your operation now or in a later, more profitable, tax year when the depreciation deductions will be worth more.

Accessing ADA savings

With the Justice Department reportedly cracking down on ADA compliance, now might be a good time for an ADA survey. Paying for the necessary improvements, additional equipment or even the survey itself creates tax deductions. The cost of the survey is, in most cases, a legitimate business expense.

Whether through building improvements or new equipment acquisitions, the expense of making your business accessible to people with disabilities also generates tax savings. There is that tax credit, a direct reduction of up to $5,000 in the operation’s tax bill, for a start.

For expenditures that do not qualify for the tax credit, an expense deduction is available for businesses that choose to treat the cost of newly acquired equipment, called Section 179 property, as an expense rather than a capital expenditure.

Remember, however, that the Section 179 deduction is not automatic. Those business owners or managers who want to take the deduction must ‘elect’ to do so. Generally, the election is made on the form for depreciation, Form 4562, and attached to the original return (including late-filed returns).

For larger expenditures, such as those involving remodeling that may not qualify for the disabled-access tax credit or the Section 179 first-year expensing deduction, there is always the depreciation allowance. Slowly but surely, recovering the cost of ADA compliance is becoming easier on the pocketbook—much easier than losing a lawsuit. Make sure you know what your options are.

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