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What to Know About R&D Tax Credits for Dentists

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What to Know About R&D Tax Credits for Dentists

Many dentists have recently been exploring the potential applicability of the R&D Tax Credit to their practices.

 

What is the R&D Tax Credit?
The goal of the R&D text credit is to encourage businesses to undertake research and development related activities, either through new or improved processes, products or software.

While the R&D tax credit has historically been claimed primarily by technology companies, manufacturing businesses, and engineering firms, the tax definition of R&D is not restricted to only certain industries or types of projects.

In order to qualify for the R&D tax credit, you must undertake activities that meet certain criteria. These activities are defined in a four-part test:

  1. Permitted purpose. Develop a new or improve an existing, product, technique, process/method or software.
  2. Eliminate uncertainty. Discover information to eliminate uncertainty concerning capability, methodology, or appropriateness of design.
  3. Process of experimentation. Substantially all the activity constitutes a process of experimentation (i.e. the identification and evaluation of one or more design alternatives).
  4. Technological in nature. Discover information that fundamentally relies on principles of hard sciences.

 

More and more dentists are now engaging in research and development as a result of improved technology, which is reshaping the dental industry.  One such example is through 3D printers, which can be used for the printing of a variety of materials, such as metals and ceramics.  In some cases, this eliminates the use of dental labs for manufacturing crowns and dental implants, saving the practice significant money.  Some orthodontic practices are using these 3D printers to manufacture their own aligners.  

Not only does manufacturing your own crowns, dental implants, and aligners save you money, it is also eligible for the research and development tax credit.  The credit is now a permanent tax credit, so why not take advantage of it this year if you qualify? 

Eligible costs would include employees’ wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  Qualified research is defined as research that is intended to discover information that is technological in nature and is used in developing a new or improved business component of the dentist’s practice.

 

There are a few different ways to calculate and use the R&D tax credit:

 

Regular Tax Credit – this credit is 20% of the research expenses that are in excess of a base amount.   The base amount involves numerous calculations and is based on numerous factors and dates.  If you use the regular credit calculation, you must reduce your research expenses deducted on your return by the amount of the credit.  

 

Alternative Simplified Tax Credit – this credit is calculated as 6% of the research expenses.  There are no other calculations that need to be made.  Also, with this credit, you must reduce your research expenses deducted on your return by the amount of the credit.

 

Qualified Small Business Payroll Tax Credit – this is the smallest of the R&D credits available.  If a dental practice meets the criteria of a qualified small business, they may be able to apply part or all of the R&D credit against their payroll liability instead of their income tax liability. This credit can apply only to the employer’s portion of social security tax.  It is also important to note that this credit can be elected each year, but cannot exceed 5 years.

 

As you can see, there are a few options available to your practice for this dental practice research and development tax credit if you meet the requirements.  If you believe some of the work you do in your practice will qualify for this special tax credit, it could save you thousands of dollars each year

 

Learn more about how the R&D tax credit can work for you.

 

WE CAN HELP

 

How Does the R&D Tax Credit Work for Dentists?
While it’s unlikely that many “routine” dental procedures will rise to the level of qualifying for the R&D tax credit, there are certain fact patterns where it could make sense for a dentist to claim the credit.

Dentists who undertake the following types of activities may be able to benefit from the R&D tax credit:

  • Working on complex cases/procedures
  • Utilizing an on-site milling machine or in-house lab
  • Creating new or improved processes, techniques, or methods
  • Utilizing new technologies
  • Creating and testing prototypes
  • Experimenting with alternative materials or attachment systems

Why Dentists Should Consider R&D Tax Credits
R&D tax credits result in dollar-for-dollar tax offsets that can be claimed in addition to the deduction of your R&D costs. The benefit of the federal R&D tax credit typically ranges from a 6% to 8% return on qualified costs (e.g. labor, supplies, and outside contractors spent on R&D activities). In many cases, state R&D credit are also available.

The R&D tax credit could be a potential tax-saving opportunity that can dramatically impact your dental practice’s financial health. But the steps to claim the credit and get the full benefit can be confusing and time consuming. Working alongside a business advisor that has a background and understanding of R&D tax credits can help your practice long term.

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