As we leave National Disability Employment Awareness Month (October), it's good to review some of the tax benefits and other provisions available to this country's disabled taxpayers.
Business-related Provisions
As noted in the webpage entitled "Disability Information for Individuals, Businesses, and Partners Providing Services" (see www.irs.gov/individuals/article/0,,id=186828,00.html), businesses accommodating employees and customers with disabilities may qualify for several tax credits and deductions.
Disabled Access Credit. The Section 44 Disabled Access Credit is a nonrefundable tax credit for small businesses that incur eligible expenditures to provide access to persons with disabilities. An eligible small business is one that that earned $1 million or less, or had no more than 30 full time employees, in the previous year.
Eligible access expenditures include expenses that are paid or incurred in connection with (1) removing barriers that prevented the business from being accessible by disabled persons; (2) providing qualified interpreters or other means to communicate with hearing impaired customers; (3) providing readers, taped texts, or other assistance for customers with visual impairments; or (4) acquiring or modifying equipment or devices for disabled individuals. See Form 8826 (Disabled Access Credit) has more information about eligible expenditures.
Barrier Removal Tax Deduction. The Section 190 Architectural Barrier Removal Tax Deduction encourages businesses of any size to remove architectural and transportation barriers to the mobility of the elderly or persons with disabilities. Businesses may claim a deduction of up to $15,000 a year for qualified expenses that normally must be capitalized.
In Information Letter INFO 2000-0272, the IRS explained how the Section 44 credit and the Section 190 deduction interact when determining how to handle costs incurred to provide handicapped parking spaces. Because IRC Secs. 44 and 190 are not mutually exclusive, a business that qualifies for the credit may also qualify for a deduction related to the same parking space work. The amount of the credit claimed under IRC Sec. 44 is subtracted from the total expenditures, and the remainder is deductible (up to $15,000) under IRC Sec. 190.
Work Opportunity Credit. The Section 51 Work Opportunity Credit provides eligible employers with a tax credit up to 40% of the first $6,000 of first-year wages of a new employee who is part of a "targeted group," which includes qualified veterans hired after May 25, 2007 who are certified as entitled to compensation for a service-connected disability. The credit is available to the employer once the employee has worked for at least 120 hours or 90 days. Employers claim the credit on Form 5884 (Work Opportunity Credit).
Qualified first-year wages for most targeted groups are capped at $6,000; however, first-year wages taken into account for qualified veterans with disabilities who were hired after May 25, 2007 is $12,000. For most targeted groups, the credit equals 40% of qualified first-year wages. Therefore, for qualified disabled veterans, the maximum credit is $4,800 per employee (40% of the first $12,000 of qualified first-year wages).
Workers in Sheltered Workshops. Many businesses misclassify workers in a sheltered workshop as independent contractors when they really are employees. Rev. Rul. 65-165 discusses the treatment of blind workers in the following situations:
- Individuals in a rehabilitation program designed to prepare them for placement in private industry. The intent of the training, which averages 16 weeks in length, is to accustom the individual to industrial working conditions. These individuals are not employees of the workshop for federal employment tax purposes while they are being trained.
- Regular workshop employees who have completed training and are capable of performing one or more jobs in the sheltered workshop while awaiting placement in private industry or permanently if unable to compete in regular industry. The workshop provides working conditions and pay scales comparable to those in private industry, and sets working hours and production schedules. These workers are employees for federal employment tax purposes.
- Individuals working at home who are incapable of working in the workshop but are able to produce salable articles and may sell them wherever they please. These individuals are not employees because no employer-employee relationship exists under the usual rules.
Impairment-related Work Expenses
According to Tab 4a, Disabled Individuals, of the Special Tax Situations Quickfinder Handbook, an employee who has a physical or mental disability that functionally limits his or her employment, or a physical or mental impairment that substantially limits one or more major life activities (walking, speaking, breathing, learning, etc.), may be able to claim impairment-related work expenses. These are allowable business expenses for attendant care at the workplace and other expenses that are necessary for the disabled person to work [IRC Sec. 67(d)].
Although employee business expenses normally are subject to a 2%-of-AGI limit, impairment-related work expenses are not subject to the limit [IRC Sec. 67(b)(6)].
Medical Expenses for the Disabled
Common Deductible Expenses. The following list from the Special Tax Situations Quickfinder Handbook includes some of the deductible medical expenses that disabled individuals may incur because of their disability:
- Artificial limbs, contact lenses, eyeglasses and hearing aids.
- Cost of Braille books and magazines above the price of regular printed editions.
- Cost and repair of special telephone equipment for hearing-impaired persons.
- Cost of equipment that displays the audio part of television programs as subtitles for hearing-impaired persons.
- Cost and maintenance of a wheelchair or autoette.
- Cost and care of a guide dog or other service animal assisting a physically disabled person.
- A special school, if the main reason for using the school is its resources for relieving a mental or physical disability.
Improvement to Home. The Special Tax Situations Quickfinder Handbook notes that the following capital improvements made to accommodate a home for a taxpayer's disabled condition or that of his spouse or dependents who live with him can be deducted in full as medical expenses since they generally do not increase the value of the home (Rev. Rul. 87-106):
- Constructing entrance or exit ramps.
- Widening doorways at entrances or exits.
- Widening or otherwise modifying hallways and interior doorways.
- Lowering or modifying kitchen cabinets and equipment.
- Moving or modifying electrical outlets and fixtures.
- Installing porch lifts and other forms of lifts that do not add value to the house.
- Modifying fire alarms, smoke detectors, and other warning systems.
- Modifying stairways.
- Adding handrails or support bars in bathrooms or elsewhere.
Expenditures for permanent improvements that ordinarily would not be for medical care may qualify as a medical expense to the extent they exceed the increase in the value of the home if the expenditure is related directly to medical care. For example, where a taxpayer is advised by a physician to install an elevator so a spouse afflicted with heart disease will not have to climb stairs, the amount (if any) by which the cost of installing the elevator exceeds the increase in the value of the residence is deductible as a medical expense.
Disability Insurance Policy Payments
Whether disability payments received from disability insurance policies are taxable depends on who paid the policy premiums. Disability payments are not taxable if the individual paid the premiums on the disability policy or contributed (on an after-tax basis) to an employer-sponsored disability plan [IRC Secs. 104(a)(3) and 105; Rev. Rul. 58-90; Ltr. Rul. 200305013]. Conversely, disability payments are taxable if the employer contributed to a funded plan or paid the policy's premiums for the employee [Kees, TC Memo 1999-41 (1999)].
For group policies purchased with both employer and employee contributions, the taxable portion of any benefits received is determined by the ratio of premiums paid by the employer to total net premiums for the three most recent years for which net premiums are known. This three-year "lookback" rule can cause a portion of benefits paid under group disability insurance to be taxable if the employer paid some or all of the premiums in the past, even if the employee paid all the premiums in the year the benefits are received [Reg. 1.105-1(d)(2)].
