Simply Junior

A lot of small business overlook the IRC Section 44 small business disabled access credit.

Essentially Section 44 provides a credit for up to one half of the costs to comply with the Americans with Disabilities Act (ADA). The maximum annual credit cannot exceed $5,000 and the costs must exceed $250. Businesses that have revenues of under $1 million or under 30 full time employees qualify for this tax credit. 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.

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

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

Arevalo had claimed a Section 44 tax credit on his personal 2001 tax return because, apparently, the Alpha Telecom payphones were modified to be ADA compliant. The US 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.

In reaching this determination, the court held that (1) Arevalo could not show how funds were expended to make the payphones ADA compliant, because Alpha Telecom, apparently, did not disclose to Arevalo how the payphones were ADA compliant 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 regard to the payphones. In doing so, the court used the old “substance over form” analysis to show that Arevalo did not acquire enough of the ownership in the payphones for it to count as a business. If Arevalo were operating the payphones he would have been able to explain how the phones were modified to comply with the ADA and he would have been the individual that was subject to the ADA.

The problem for taxpayers is that many common transactions could fall prey to this analysis, such as leasing/sales arrangements and even sales/consignment arrangements.

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

Well, for better or worse, the healthcare bill has been signed into law. There is no immediate benefit in being angry. There are a number of legal actions started by various Attorneys General alleging that the reforms are unconstitutional. Even if some of these cases succeed on the issue of mandatory insurance for private individuals, this will not necessarily strike down the whole bill. The likelihood is we will be left with all the provisions dealing with small businesses. Keeping it real, we have to start planning for the future on the law as it is. The good news is that the main raft of provisions will not become active until 2014. This gives the lawmakers plenty of time to have second thoughts. Just as important, there are sets of regulations to be written clarifying the detail of how some of the new features are to work at state level. However, this is an outline of what we can expect.

The states are to establish SHOP exchanges where small businesses can group together and buy insurance. For these purposes, until 2016, a business is considered small when it has no more than 50 employees, with states having the option of increasing the limit to 100 employees. To calculate numbers, you pro-rate the full- and part-time employees. Independent analysts predict group premiums will drop no more than 4%, while the value of the cover will rise by up to 3%. To bridge until the exchanges are operating, a tax credit system will come into force. If your business has less than ten employees with an average annual pay of less than $25,000, the credit is 35% of the health plan cost. There are partial credits where the number of employees is less than 25 and their average annual pay is less than $50,000. When the exchanges start, the credit increases to 50% for the first two years.

With immediate effect, there are a ban on terms designed to cap the value of claims, and limits on the right of insurers to cancel policies except in cases where actual fraud can be proved. As from 2014, the insurers must accept all employees without regard to pre-existing conditions. Their calculation of premium rates can only be based on location, age and whether an individual smokes. As from 2014, small businesses with more than 50 employees will be required to provide a health plan or pay an annual penalty of $750 for every full-time employee denied cover. This can rise to $2,000 if coverage is still denied.

So, tomorrow, you will be going out into the same market as before the reform bill became law. Finding cost-effective small business insurance will continue to be a struggle. Indeed, many insurers may increase premiums now so that, when the SHOP exchanges do come into force, they have a margin to play with to deal with the competition. However, when you buy, check that the new terms on the total value claimable and restrictions on the right to cancel have been introduced. If you buy your small business insurance through an agent, ask direct questions. It saves time fighting over whether wording is unlawful later on.