Bowen: Newsworthy

If you purchase an elevation table, a visual display system, or other device that helps you service the disabled, does that expenditure entitle you to a 50% tax credit under the Americans With Disabilities Act?  If you answered yes, you are not alone.  Most health care providers – regardless of specialty – have heard the mantra of the availability of Section 44 tax credits if you purchase a certain table/chair/device/visual system/etc.  You receive up to $5,000 in credit, along with additional depreciation.  That $10,000 table now costs less than $3,600!

It is a great story – who would not want to get a fat tax credit to lower the cost of acquiring new equipment?  And if that brochure/website/seminar salesman states their equipment qualifies, who are you to argue?  If your accountant then takes that deduction and the IRS does not disallow it, it must be allowable, right?

As the saying goes, there is an easy answer to every problem – neat, plausible and wrong. 95% of health care providers that purchase “qualifying equipment” and take the ADA credit were not eligible to do so.  Now I did just make up that statistic, but let me lead you through the maze of the ADA and subsequent Tax Court decisions to show you why I am confident in doing so:

The ADA was passed in 1990 to eliminate discrimination against individuals with disabilities and contains a credit for “eligible access expenditures” to help offset costs incurred by small businesses complying with the Act (“small business” means less than $1M in gross revenue or fewer than 30 employees).

Title III bans discrimination in public accommodations for the “full and equal enjoyment” of goods and services by disabled individuals.  This discrimination includes “failure to take steps to ensure that no individual with a disability is denied services because of the absence of auxiliary aids and services” (emphasis added to keep you from nodding off).

These “auxiliary aids and devices” include equipment for the visually and audibly handicapped, along with the “acquisition or modification of equipment or devices”.  This is the peg the coat is hung on, or something to that effect, which is why you see the phrase “adaptive equipment” so often from equipment manufacturers.

SO….in purchasing your equipment, you are, in theory, making an eligible access expenditure, by acquiring auxiliary devices so you do not fail to take steps to prevent discrimination that would prevent disabled individuals the full and equal enjoyment of your services, thus complying with the ADA , thereby earning a tax credit.   Correct reasoning, but probably not applicable to your situation.

 There are only three Tax Court decisions I found that directly address this issue: Fan (July 2001, dentist, credit denied for an intraoral camera system); Ricker (August 2001, dentist, credit denied for specialized x-ray equipment); and Hubbard (August 2003, optometrist, credit allowed for testing equipment).  There are Internal Advice Memorandums and Appeal Decisions that reach similar results, but Tax Court Decisions ultimately control.  All three decisions are clear and well reasoned:

1.  The credit is only available to businesses that are not already compliant with the Act.
2.  Non-compliance with the Act is found when the provider actually turned away patients – refused treatment – due to a lack of equipment.
3.  If the provider was not in compliance, the particular equipment qualifies for the credit only if it completely eliminates the need for other adaptive measures.
4.  The purchase of equipment that merely helps or assists the patient, the procedure, the office, or the provider, does not qualify for the credit.
5.  The purchase of equipment that replaces existing equipment does not qualify for the credit.
6.  Equipment that is employed for general use by non-disabled patients is, without other facts present, presumed to not qualify, though Hubbard held that this alone is not fatal to credit availability (no “exclusive use or benefit test”).
7.  Even if all of these criteria were met, Hubbard stated that the expenditure still needed to be reasonable, which is determined by the cost relative to business revenues.

The Tax Court has thus taken a very narrow reading of the credit availability under the Act.  Several commentators (employed by equipment manufacturers) have expressed their opinion that the matter is open for interpretation, hence the qualified language on many brochures and websites that their products may qualify for the credit.

Other commentators have cited the paucity of cases as the basis for future interpretation.  However, since the maximum credit available is $5,000, it is simply not cost effective to go through the several layers of appeal necessary to provide us with many Tax Court opinions.

Up until a few months ago I was not aware of any of this.  I had joined the chorus of those that championed purchases of particular equipment to lower tax liability.  However, it was when a client had his credit denied and then denied again upon appeal that I took a closer look, researched the law, Tax Court opinions and interviewed professionals and others about the issue, and realized that my client and I were wrong and the IRS was right.

One interesting discovery I made is that even employees of the IRS are not aware of the scope of the issue.  I have spoken to many people – including appeals agents – that had never run across the issue before. The denial of my client’s credit, for example, was the correct determination based upon his set of facts, but the Service used incorrect reasoning – it was the first time that the appeals officer had encountered the credit.

It is thus excusable that most tax preparers are not aware of the limitations of the credit, since the credit is usually not disallowed due to very low corporate audit rates and a paucity of discussion in accounting journals.

However, it does seem odd that the equipment manufacturers themselves appear unclear about the credit. If you sold expensive equipment and promoted the purchase with a credit teaser, you probably would have applied for a Private Letter Ruling from the Service on the applicability of the credit to your equipment.  You would think.

I can only think of a few explanatory scenarios:

1. they are not aware of the availability of the PLR process;
2. they are relying on incomplete advice by their accountants;
3. they do not want a Ruling by the IRS; or
4. they have a Ruling, but it is not favorable to their situation.  

To be fair, many manufactures probably just have accepted conventional thought on this and have not even considered an alternative – they really believe that their equipment meets the ADA criteria.  This possibility does seem to be a stretch, however, when you see hand-held lasers and chiropractic adjustment devices marketed as applicable for the ADA credit, due to their “portability”.

Several manufacture’s websites do slightly qualify the credit applicability to their products.  Others are silent, while still others flat-out state that the credit applies. Speaking to over a dozen employees of well-known manufactures of this type of equipment (elevation tables, language displays) all insisted that their equipment qualified for the credit, though none had any documentation from the IRS that would support their claims.

My cynical conclusion is that it is simply too tempting to sell an expensive piece of equipment by generally stating the availability of a tax credit, instead of going through a lengthy explanation of the very narrow and complex circumstances of applicability.  It is much easier to attempt to limit their own liability through small print advisories on written material, while stating in person that the credit applies.

I hope that it is apparent from this that it is not the equipment itself that qualifies for the credit, but the use of that equipment along with the treatment history of the provider that is determinative.  Providers need to examine any decision to purchase equipment that is predicated upon the availability of the credit.  Manufacturers and distributors need to reduce or eliminate the implication their equipment qualifies for the credit.  It would also help if the Service issued a Notice that would publicize the issue to tax professionals.  Until then, though… can I sell you a brand new elevation table?  It might cost $10,000, but after a tax credit, the cost is only….. 

Life would be a lot easier for all of us….if tax laws didn't change all the time.  If tax law was black and white.  Yes or no. Right or wrong. This is true…about 10% of the time.

As you probably know by now…showing losses on a side business (called hobby business by the Service) is one of the easiest ways to find yourself across from a tax auditor.  It has become harder and harder to win the economic expectation argument and, as the IRS is looking for additional revenue, these audits (sched C, sched F…) are becoming more frequent. Well, the taxpayer won one recently, but it was tough:

Patti Blackwell completed an Equine BA at the U of Minnesota – business management of horses. She bought quarter horses with recognized bloodlines, rode in shows, won prize money, and participated in social events.  She advertised on her website, on business cards, calendars, clothing, flyers, and in videos and magazine articles. With all this, the Blackwells still showed substantial losses. 

Even with this level of activity and expectation of profit, the IRS decided to disallow the losses, resulting in heavy tax and interest. She appealed, however and surprisingly the Court reversed the Service, finding a realistic expectation of profit.  Read the case to see if your activity is even close to what it takes to win:

Blackwell v IRS

Bottom Line…you may be able to win a case with facts this strong (very unusual), but why invite the audit to begin with?  Report gains, not losses.  How?  Come to a seminar and find out!

Right now there's an email going around that has most of us tax professionals shaking our heads.  It warns that starting in 2013, the healthcare reform act imposes a 3.8% sales tax on home sales. If you sell your $400,000 home, you'll owe a $15,200 tax!

The truth, as is often the case with taxes and emails, is a little more complicated – and a lot less scary. First, let's take a look at how taxes are figured on home sales today:

•   First, calculate "adjusted sale price." This is the sale price of the house, minus expenses of actually selling it (last-minute fixups, commissions, etc.).

•   Next, subtract "adjusted basis." This is the price you paid for the house, plus closing costs, plus any improvements you make that add value, prolong its life, or give it a new or different use. "Adjusted sale price" minus "adjusted basis" equals "gross profit."

•   If you've owned your home for more than two of the last five years and used it as your primary residence for more than two of the past five years, you can subtract $250,000/$500k.

•   "Gross profit" minus "allowable exclusion" equals taxable gain. If you hold your house longer than a year, it's taxed as long-term capital gain and capped at 15%

The bottom line here is that few home sales are taxable – especially in today's down market. So, where does the new healthcare law come in? Well, it does impose a new "unearned income Medicare contribution," beginning in 2013, of 3.8% on capital gains, for individuals earning over $200,000 and families earning over $250,000. 

That means any gain on the sale of your home that isn't already sheltered by the $250,000 or $500,000 exclusion might be subject to the new tax if your adjusted gross income is over the $200,000 or $250,000 threshold. That's a pretty far cry from saying there's a new 3.8% sales tax on home sales.

 But somewhere along the line, Chicken Little saw the new 3.8% tax, missed the rest of the story and sent an email that spread faster than the latest news about Snooki or the Kardashians. 

Bottom Line…The next time you get an email with a rumor that sounds too awful to be true, don't just run around like Chicken Little. Send it to me. I can tell you if it's something you really need to worry about – and if so, I'll help you craft a plan to avoid or minimize the threat.

J. Paul Getty used to say that all you had to do to make money was to get up early, work hard and strike oil.  Not bad words to live by, unless you happen to live in a condo.

To:         Senate Committee on Finance

From:    James Bowen, Whitefish, MT

Re:        Payroll Tax Increase

I need to voice strong concern over discussions reported today that would subject all income from service S corporations that have one or few shareholders to FICA and Medicare taxes.

All of my clients fit this category.  This would be a severe blow to the viability of many of my clients and to the profitability of all.  For other occupations that are having even a harder time than small medical practices (such as architecture) it would be devastating.

This should be opposed for a number of reasons.  I can quickly think of 22:

1. This would simply hurt a large sector of our businesses at a time when they cannot afford it;

2. The proposal would eliminate the dividend characterization for certain S corporations.  This is a huge change in corporate law theory and practice and should not be taken lightly and without thorough, national discussion and analysis.  The public exposure only a week prior to a vote is no way to approach this issue;

3. This would be a disincentive to start a new business with risk capital, instead of joining another as an employee;

4. If Congress wants to encourage new small business formation, this should not be considered.   Additional tax relief is what is needed;

5. The small business owner already pays both sides of FICA.  California sole proprietor business owners, for example, pay over 50% in every dollar they receive in salary in Federal, State and payroll tax;

6. People that have not run small businesses either forget or do not realize that the business owner contributes much more to the business than just the service portion – they provide (and are liable for) the facility, equipment, management, hiring-firing, marketing, etc.  Their actual service contribution as a health care professional, whether it is filling a cavity, treating a skin disease, or providing physical rehabilitation is a separate activity that in most cases takes less a percentage of time than the former;

7. There always has been and there should be a tax recognition of risk capital vs salary income.  This measure would eliminate that recognition and the current incentives to risk (e.g. possibly lose) personal funds.

8. A material difference between the small business owner and the employee is the guarantee and reliability of the income.  The small business owner has no reliability of income, much less salary and should not be treated the same as an employee.  There is a good argument that taxation should reflect variability and risk and to treat the employee and the small business owner equally just does not make sense;

9. Gains from the business are still taxed on line 17 – it is not a tax-free “loophole”;

10. Losses are treated as capital losses – fundamental fairness dictates that gains should have the same treatment;

11. The GAO report calls for Congressional clarification of reasonable salary, not to define all gain from a small business as such;

12. The figures quoted from the report as misreported income, thereby “depriving” the government of legitimately owed tax, is only valid if you assume all active income is currently subject to FICA.   Court decisions have affirmed that it is not;

13. The Feb 10, 2010 letter from the GAO, in fact, recommends a payroll tax reduction to spur economic development.  They were referring to new hires, but the effect is the same;

14. I have not seen any details, but unless all income is subject to FICA, instead of just to the wage base, this would be an extension of a regressive tax.  The first $106,800 would be subject to 15.3% in FICA and Medicare, but the higher income business would receive additional monies at only the 2.9% Medicare rate.   Any increase in income tax or Medicare tax for earners over $250,000 would not begin to make up for this discrepancy.  As such, the proposal would discriminate against the truly small business.  As Warren Buffet has said, his secretary pays a higher percentage of her income in taxes than he does.  It is true that this regressive tax applies to wage earners as well, but it has twice the regressive impact to the small business owner;

15. This would instantly drive the small business owners to find ways to report lower profitability.  There are many of them available to the innovative and creative CPA community, with the result of characterizing business operations further from what they actually are;

16. This would also make the C corporation structure more attractive.  More benefit plan deductions will reduce reported profits and owner salaries.  Accounting and planning costs will rise, also affecting profits.  Profits will stay in the corporate structure with far less tax impact than subject to individual income tax.  Hard to say where this money would be invested, but it would not be put in general commercial circulation, hence lower the profits of other manufacturing and service businesses;

17. The estimates of additional revenues would more than likely be optimistic, due to the previous observations;

18. The ability to raise additional revenues should not be mistaken for a reason to do so;

19. If Congress needs to raise this revenue, at least make it income based, similar to the $250,000 threshold other tax revisions have used.  It is hard enough to live when your company only makes $50-100,000.  Do not make it harder for these people;

20. Bad politics.  Once again Congress will be seen as attacking the entrepreneur, the small business person, while not touching large corporate compensation packages;

21. Bad reporting (though not your concern).  The use of the words loophole, fudging, misreporting, etc unnecessarily and misleadingly color the issues; 

22.  Arbitrary and discriminatory.  The professions that are to be targeted are, in operation, separation of services and profitability, no different from any other unregulated service business or other commercial enterprise.  Think flower shop owner or hair salon owner.  There is also no legitimate reason, in my opinion, to exempt manufacturing from this change, as has been proposed.  The fact of an owner providing different or a diversity of services should be a distinction without a difference.  The current reasonable salary requirement should apply to all types of businesses equally and any changes should also apply equally.

In over 26 years of business consulting, this, in my opinion, would do more to hurt the professional small business owner than any change or even proposal I have seen.

Do not let this happen.

James Bowen

Latest research shows traditional core strengthening (sit ups and other common ab work) actually increases back instability and problems.  Learn what works and what doesn’t work:   
well.blogs.nytimes.com

Earlier concerns were ignored as zinc-abuser whining, but the reports of a loss of smell keep pouring in – over 1,000 to date.  Seems that sticking zinc up your nose may not be the best thing for us, a fact learned 50 years ago during polio prevention research.  Killed a sense (many times permanently) of smell then, and still does.
well.blogs.nytimes.com