Since the Americans with Disabilities Act (ADA) was enacted in 1990, employers have been required to make their workplaces accessible to employees and customers with disabilities.
The law requires an employer to provide reasonable accommodation to an employee or job applicant with a disability unless doing so would cause significant difficulty or expense for the employer. A reasonable accommodation is a change in the work environment or work practices to help a person with a disability apply for a job, do the job, or enjoy the benefits and privileges of employment.
Since the cost of making these accommodations to your business can be expensive, the IRS allows small businesses to deduct a portion of the cost of any property you buy and any upgrades you make for this purpose. The deductions, in this case, is a tax credit for 50% of the allowable amount for eligible expenditures.
In addition to the tax credit, you may also be eligible for a tax deduction for expenses of removing barriers to access (explained below).
Eligibility for the Disability Tax Credit
You will need to determine if your small business qualifies for the credit. For the purposes of this credit, the IRS says that a qualifying small business must have gross receipts (reduced by returns and allowances) of less than $1 million for the preceding year, or have no more than 30 full-time employees.
Qualified Updates and Improvements
First, consider what qualifies as a disability. For an individual, a disability is a physical or mental impairment that substantially limits one or more major life activities. The disability must be recorded or "be regarded" as having such an impairment.
Then consider the types of improvements you have made or want to make to improve access for those with disabilities. Eligible access expenditures include:
- Removing barriers that prevent a business from being accessible to or usable by individuals with disabilities;
- Providing qualified interpreters or other methods of making audio materials available to hearing-impaired individuals;
- Providing qualified readers, taped texts, and other means of making visual materials available to individuals with visual impairments; or
- Buying or modifying equipment or devices for individuals with disabilities.
The expenditures must be reasonable and necessary to accomplish the purpose.
Eligible expenditures don't include expenditures paid or incurred in connection with a facility first placed in service after November 5, 1990. In other words, the ADA gives the tax credit for improving older buildings to bring them up to current ADA standards.
Barrier Removal Tax Deduction
The IRS also has an Architectural Barrier Removal Tax Deduction to encourage businesses to remove barriers to mobility for the disabled and elderly. Your business can deduct up to $15,000 a year for qualified expenses. It is a significant benefit because usually, these expenses would have to be capitalized (depreciated) over several years), and this deduction allows you to claim the expenses in the first year they are put in service. You can also depreciate any costs over the $15,000 maximum.
You can claim the deduction on your income tax return by identifying the deduction as a separate expense on your business tax return.
For more information, see this checklist for barrier removal from the Americans with Disabilities Act.
Tax Credit Limits
Let's say you have determined that your business qualifies and that the types of improvements also qualify for the tax credit. You can take a tax credit for 50% of eligible expenditures (noted above) over $250 up to $10,000 a year. So your tax bill can be reduced by up to $5,000.
You can claim both the disability access tax credit and the barrier removal tax deduction in the same year if the expenses meet the requirements of both sections. The barrier reduction deduction makes up the difference between the maximum tax credit and the amount you have spent.
Be sure to keep excellent records on the cost for disability access and barrier removal and include diagrams and drawings, to support your credit or deduction in case of an IRS audit.
Applying for the Tax Credit
You apply for the disability access tax credit on your business tax return, using IRS Form 8826. To complete Form 8826:
- Enter the total eligible access expenditures on line 1.
- If the amount on Line 1 is less than $250, you can raise the amount to $250.
- If the amount is more than $10,000, you are only eligible for $10,000.
- Multiply the amount ($10,000 or less) by 50% to get the tax credit amount.
Then you will need to add this form to any other tax credits your business is applying for. The form you use depends on your business type.
- Partnerships and S corporations must report this tax credit and other tax credits on Schedule K-1. This includes multiple-member LLCs taxed as partnerships. (Schedule K-1 reports owner income and is included on the owner's personal tax return.)
- All other business types must include this tax credit on Form 3800 General Business Credit.
This article is general information, not tax or legal advice. You must follow IRS guidelines to receive these tax credits; the IRS checks to see that the credit is not abused. Make sure you are following the guidelines during construction and get help from your tax professional to complete the application.