Qualifying for the Research and Development Tax Credit
Many CAD/CAM processes could earn tax refunds for the laboratory
Jonathan Hill, BS
"I love paying taxes," said no one ever. Let's face it: Nobody enjoys paying taxes and we all feel we are overpaying. Dental laboratory owners wear many hats to keep their businesses running, and they work effortlessly to keep the money that they bring into the laboratory. It seems the harder they work, the more they owe in taxes. While this may seem discouraging and frustrating, there is good news and great news.
A largely unknown tax credit is available for dental laboratories: the Research and Development Tax Credit. Not only is this credit a reduction to current and future years' tax liabilities (the good news), but it can also be a source of cash for you now via tax refunds (the great news).
What is the R&D Credit?
The Research and Development Tax Credit falls into Section 41 of the IRS Tax Code. It is a government-sponsored tax incentive that rewards companies for conducting research and development in the US. The credit was implemented to incentivize innovation, experimentation, and business improvement throughout the economy and to keep jobs here in the US.1
However, what constitutes R&D with regard to the credit is much more expansive than many laboratory owners might realize. Technical processes and activities qualify companies from numerous industries. If you are utilizing CAD/CAM technology in your laboratory, you are likely eligible. It is available for dental laboratories of all sizes, not just large manufacturing facilities with their own internal research laboratories.
Based on the IRS code,2 qualified research activities are defined by a simple four-part analysis:
• Is it technological in nature?
• Is it intended to eliminate uncertainty?
• Is it experimental in the sense that the activity is systematically trial and error?
• Is it performed with a purpose to improve performance or functionality?
Many dental laboratory activities involving CAD/CAM can qualify based on those requirements. Additionally, the amount of time spent on these activities throughout the year can be used for deductions based on the wages paid.
How Much Money Is Available for Laboratories?
The author is aware of small businesses whose credits have ranged from $5,000 to $100,000 and beyond depending on their size, eligible activities, and number of employees. Simply put, the more work you are doing and the more W-2 employees you have, the larger potential tax credit you can receive.
The R&D Tax Credit can be claimed retroactively for up to 3 years as well as for every year moving forward, and the IRS will send you a check for the full credit amount, including interest.
Claiming the Credit
The first step is to find a firm or expert that specializes in R&D Tax Credits, typically followed by an initial qualification appointment to determine your eligibility. The qualification call would allow an expert to learn about the laboratory processes and systems, including restorative options available for dentist clients and reviewing current tax documents. After this initial call, a determination is usually made on the percentage of qualifying research activity you can apply to your laboratory year over year. Once that is determined, corporate and personal taxes can be amended to claim the credit and get refunds for the previous 3 years. The credit can also be applied proactively to current tax filings to reduce the amount owed.
The course of the past year has brought many unexpected challenges for each of us on personal and professional levels. But with every challenge comes opportunity. Having been immersed in the dental laboratory industry for 17 years, and the son of a CDT, the author understands how the inside of a dental laboratory works and has found that these R&D Tax Credits can be a tremendous economic boost to keep the laboratory engine running during these challenging times.
1. Muresianu A and Watson G. Reviewing the Federal Tax Treatment of Research & Development Expenses. Tax Foundation. https://taxfoundation.org/research-and-development-tax/. Published April 13, 2021. Accessed September 9, 2021.
2. SEC. 41. CREDIT FOR INCREASING RESEARCH ACTIVITIES. IRS website. https://www.irs.gov/pub/irs-regs/research_credit_basic_sec41.pdf. Accessed September 9, 2021.
About the Author
Jonathan Hill, BS, is the owner of EXCELerate, LLC, in Charlotte, North Carolina.