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December 11, 2006

The Section 44 Small Business Disabled Access Credit

Federal Income Tax

Houston Tax Attorney

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The Section 44 small business disabled individuals tax credit provides a tax incentive to comply with the Americans With Disability Act of 1990 (“ADA”).  There is very little guidance for the tax credit.  The recent Arevalo v. Commissioner, No.?05-61129 (5th Cir. 2006), case provides an opportunity to consider this tax credit.

Facts & Procedural History

Arevalo “invested” payphones with Alpha Telecom. Alpha Telecom purports to “sell” payphones as “business opportunities.”  If the “business owner” agrees, Alpha Telecom essentially manages and operates the payphones for the “business owner.”

Arevalo had claimed a Section 44 tax credit on his personal tax return for 2001 given that the Alpha Telecom payphones were modified to be ADA compliant.  

The IRS audited Arevalo’s return and disallowed the credit.  The U.S. Tax Court did the same, which resulted in the decision from the court of appeal.  

The Section 44 Tax Credit

Section 44 provides a tax credit up to $10,250 for small businesses to spend funds:

  • for the purpose of removing architectural, communication, physical, or transportation barriers which prevent a business from being accessible to, or usable by, individuals with disabilities,
  • to provide qualified interpreters or other effective methods of making aurally delivered materials available to individuals with hearing impairments,
  • to provide qualified readers, taped texts, and other effective methods of making visually delivered materials available to individuals with visual impairments,
  • to acquire or modify equipment or devices for individuals with disabilities, or
  • to provide other similar services, modifications, materials, or equipment

Thus, most costs to purchase equipment or devices and to create or modify personal or real 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.

In addition to the dollar caps noted above, the tax credit is limited to 50 percent of the amount spent.  

Businesses that with gross revenues under $1 million or less than 30 full time employees can qualify for this tax credit.

Entitlement to the Tax Credit

The U.S. Tax Court and the Fifth Circuit (just like the Sixth Circuit did with a different taxpayer) held that Arevalo was not entitled to the Section 44 tax credit.  There were several reasons for this decision, including:

  • The prior precedent whereby the courts held that Alpha Telecom purchases are “investments” and not “businesses.” 
  • Arevalo could not show how funds were expended to make the payphones ADA compliant because Alpha Telecom did not disclose to Arevalo how the payphones were ADA compliant
  • 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.

This decision is not surprising given the facts.  The Section 44 disabled access tax credit can provide a great benefit for the right facts.  The Arevalo case helps clarify what those facts are.

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