Can Dentists Claim the Research & Development Tax Credit?

June 8, 2020 | Article

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.

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.

Let’s see look at how to run your dental practice more effectively.