R&D Tax Incentive Can Stimulate Dentists’ Business Growth
Originating as part of the Economic Recovery Tax Act of 1981, the Research and Development (R&D) Tax Credit has been providing tax incentives to innovative companies and industries that conduct business on US soil. In its 40-year history, the R&D Tax Credit has been renewed 15 times, becoming permanent law as part of the 2015 Protecting Americans from Tax Hikes Act. Having been refined throughout the decades to be made easier to apply for, the tax credit pertains to most industries, including dentistry.
By IRS standards, any business engaging in qualified research activities (QRAs) is eligible to receive a portion of its qualified research expenses (QREs) in the form of a tax refund for the business' qualifying expenses over the previous 3 years, or a tax deduction if the claim is made on time. These R&D tax credits can amount to savings on federal and state income tax and to the deduction of a practice's research and development costs.
Eligible QRAs must meet the following criteria as outlined in the four-part test from the IRS:
· the research activity must be technological in nature
· it must create new products or improve products or software
· it must have a process of experimentation to test the validity of new products/processes
· it should eliminate uncertainty
Under these guidelines, it is fairly easy to see why dentists make excellent R&D Tax Credit candidates.
The aforementioned QREs are the accompanying expenses incurred as a result of taking part in any activities that meet the IRS four-part test. These could include, for example, employee wages paid for qualified services, costs of supplies associated with qualifying activities, third-party contract labor hired to engage in qualifying activities, and many, many more. The R&D Tax Credit can be especially lucrative for dentists, because the majority of practitioners have transformed the provision of dental treatment primarily through the implementation or development of new technologies. It is critical to the success of a dental practice to constantly test and experiment with new technologies and streamline certain processes.
For example, a dental practice might implement an intraoral scanner into the practice thereby allowing for the creation of 3D digital scans of patients. This technological solution, in turn, enables dentists to monitor their patients' progress over time, eliminate the process of making molds, and significantly lower their redo/remake rates due to the technology being more highly accurate on a first-run basis. Another example is that of dentists conducting their own dental crown lab work in-house. Through the implementation of technology such as chairside CAD scanners and CAM milling units, dentists are able to create a process that takes hours instead of days.
Each of these activities costs money to implement and maintain. The employee training that must take place, the change of workflows, the physical supplies that are needed for these processes, and so on, can be expensive. These expenses are what the R&D Tax Credit aims to recover for the business owner in order to incentivize additional expansion of the practice, hiring of additional personnel, and further research and experimentation. The alternative simplified crediting method, which allows CPAs to use baselines, percentages, and industry averages while completing the calculation, streamlines the application process for this tax credit, and advisor-type companies are available to evaluate and provide a concise estimate of what a dental practice may be eligible to receive. It is worth noting that, according to the IRS, as of 2017 only about 5% of all eligible businesses were claiming credits to which they were entitled. Most dentists simply are not aware they qualify to receive potentially massive tax savings that other industries have been taking advantage of for years.
The R&D Tax Credit has the potential to provide dentists substantial tax savings and strengthen their financial health, thus allowing them to discover new ways to innovate, design, test, evaluate, and improve their practice-as they practice. With the elimination of the "Discovery Rule" in 2003, which required R&D activities to be "new to the world," the tax credit has been expanded, yet the vast majority of dental practices are not currently applying for it. Now may be a good time for innovative dental practitioners to explore this opportunity.
About the Author
CEO/Founder, Medical Incentive Advisors
(medicalincentiveadvisors.com), which specializes in helping medical professionals recover profits utilizing the Research and Development Tax Credit