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The impact of the COVID-19 pandemic has been difficult for businesses, creating unexpected issues and challenges in managing daily business operations. Although some businesses managed by transitioning to a remote work environment, others relying on in-person service were left struggling. This is especially true for dental practices which have not been able to return to full capacity. According to the American Dental Association’s (ADA), COVID-19: Economic Impact on Dental Practices report, only 34% of California dentists report conducting business as usual, 66% reported being open but with significantly reduced demand. Given this reality, it is no surprise that many practices are looking for ways to increase funding, including through the Research & Development (R&D) tax credit. Many questions arise around if dentists are eligible and what activities may qualify. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
R&D Tax Credit Overview
The R&D tax credit, also referred to as the Research & Experimentation (R&E) credit, is designed to incentivize businesses across all industries to engage in research and innovation. Initially implemented in 1981 as a temporary federal tax credit, it was made permanent in the PATH Act of 2015. The credit results in a dollar-for-dollar tax offset, which can be claimed in addition to R&D expenses. Qualifying businesses can elect to use credit amounts to reduce federal tax liability in the current years or may use it on a carryforward basis for up to twenty years. It is a popular credit because many businesses, including dentists, can claim it for current business activities.
4 Part Test
To determine whether a dental practice can claim the credit, it is necessary to evaluate activities against the 4-part test. Remember, to qualify, the work being conducted must meet all of the criteria established in the test, including:
- Elimination of Uncertainty – A dental practice must demonstrate there has been an attempt to eliminate uncertainty about the development or improvement of a product or process. This means minor changes made solely for aesthetic purposes would not qualify.
- Process of Experimentation – A dental practice must demonstrate through modeling, simulation, or trial and error, that alternative methods for achieving the desired outcome have been evaluated.
- Discovering Technological Information Test – Requires the process of experimentation is based on science such as chemistry, biology, or engineering.
- Business Component Test – Requires the purpose of the research to be focused on creating a new or improved product or process, which results in increased performance, function, reliability, or quality.
Qualify Dental Practice Activities
Since much of the daily work conducted by a dentist is based on well-established processes and procedures, the routine work does not qualify. However, certain activities qualify, including:
- 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
At a time when many dentists are struggling to return to pre-pandemic volume, the R&D tax credit can offer a compelling savings opportunity. However, since only limited activities qualify, it is essential to consult with a qualified tax advisor to assess your situation and evaluate potential savings. If you have questions about the information outlined above or need assistance with another tax or accounting issue, JLK Rosenberger can help. For additional information, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.