How to Claim R&D Tax Credits for Dentists in 2024

While the research and development tax credit was initially designed primarily to support more research in the fundamental sciences and technologies, its scope has grown over time. 

Different industries have successfully argued that at least some of their work qualifies as R&D.

Dental offices are among these industries, as they introduce new technologies, dental materials, and techniques to their offices, all of which qualify as R&D activities.

We’ve designed this guide to help dental practices understand how claiming R&D tax credits for dentists works.

We’ll go over how to check if your practice is eligible, how to claim the credit, and how much you can expect to save on your tax bill.

What is the R&D Tax Credit?

The research and development tax credit encourages businesses to innovate and think ahead. It credits an average of 6.5-10% of QREs (Qualified Research Expenditures) including wages, supply costs, and contracted research expenses.

The R&D tax credit applies mainly to small and medium-sized businesses. It provides tax incentives for:

• Developing new products or services
• Improvements in old products or services
• The creation or testing of new prototypes 

How Does the Research & Development Tax Credit Work?

The R&D tax credit provides tax breaks to companies that conduct research and develop new products, improvements, and other innovations.

If the firm has been in business for less than 5 years and has less than 5 million in gross receipts, the R&D tax credit can be applied to payroll taxes. This allows firms that have yet to profit to benefit.  

Can Dentists Claim The R&D Tax Credit?

Yes, dental practices can be eligible for the R&D tax credit.

While the credit was previously seen as something only for traditional research or technology-oriented industries, it now applies to a much wider range of sectors.

It can apply to any industry with activities that contribute to general innovation, including dentistry. 

Dental practices often adopt new methods to improve their processes, products, and procedures.

This is especially true if the dental practice keeps up with the latest research in the field and uses it to innovate their own practices. This can be claimed under the R&D tax credit.

How to Claim R&D Tax Credits for Dentists

Check Your Eligibility

Eligibility for the R&D tax credit for dental practices comes from performing qualifying research activities. Eligibility is not limited to fundamental research but includes a wide array of activities. These include:

• Improving existing processes
• Developing new dental products
• Inventing new dental technologies

The key to an activity’s eligibility comes from passing the four-part test, which can be summarized as: 

1. Have the purpose of improving a business component.
2. Uses experimental methods.
3. Uses the hard sciences.
4. Overcomes technical uncertainties or challenges.

For dental clinics, this can be activities like developing a new dental composite material or streamlining patient management software. As long as the activity can be argued to engage in the four criteria above, it can be claimed for the R&D tax credit.

The Four-Part Test

To qualify for the R&D Tax Credit, your projects must be engaged in activities that pass the four-part test that was created by the precedent set by the 2023 IRS case:

1. Permitted Purpose – The project aims to create or improve the functionality, performance, reliability, or quality of a business component.
2. Elimination of Uncertainty – The project begins with uncertainty about how to achieve the project goal and involves work to eliminate this uncertainty.
3. Process of Experimentation – The project involves a systematic process of experimentation by evaluating one or more alternatives.
4. Technological in Nature – The experimentation relies on the hard sciences, such as engineering or computer science.

Although still somewhat subjective, using previous examples to show that one’s efforts fall within the four parts is the most straightforward way to claim your case.

Speak to a Tax Planning Team

A good tax planning team is key to getting the most out of R&D tax incentives for dentists. 

Tax professionals are able to navigate the nuances of tax law in order to get your practice the maximum benefit without risking penalties during an audit. 

You can work with the tax experts at RevenueSafe to get the most out of these benefits, ensuring a stress-free tax claim that saves you time and money. 

Examples of R&D for Dentists

• Innovating new dental procedures: This could involve developing minimally invasive surgical techniques or using novel materials that promote faster healing.
• Developing custom dental appliances: Creating custom dental appliances such as crowns, bridges, and orthodontic devices using 3D printing and computer-aided design (CAD) represents a significant area of R&D. 
• Researching and testing new materials for dental restorations: More durable, biocompatible, and aesthetically pleasing materials, such as alloys, ceramics, or composite materials that can withstand the rigors of dental use.

These examples show how wide a breadth of activities within dentistry qualify for R&D tax credits. 

How The IRS Calculates the R&D Credit

The IRS uses two primary methods for calculating the R&D tax credit: the traditional and the Alternative Simplified Credit (ASC) method.

1. Traditional method – Document and calculate 20% of research expenses over a base amount. The base amount is a fixed-base percentage multiplied by the average annual gross receipts for the last 4 years.
2. Alternative Simplified Credit (ASC) method – This method calculates the credit based on 14% of the qualified research expenses (QREs) that exceed 50% of the average QREs for the 3 preceding tax years. If the company had no research expenses in any of the previous three years, the credit is 6% of the QREs for the current year​​.

The approach you should choose depends on the calculation method that best suits a company’s financial situation and R&D spending patterns.

How Much Can Dentists Earn from the R&D Tax Credit?

The R&D Tax Credit offers dentists significant potential earnings. The exact amount depends on the scale and scope of the activities undertaken. The credit is calculated as a percentage of the qualified research expenses (QREs) incurred during the tax year. 

For dental offices, these expenses primarily include:

• Salaries: Compensation for employees directly engaged in R&D activities. This can be a substantial figure, especially in practices dedicating significant time to research and development projects.
• Supplies: The costs of materials used exclusively for R&D purposes, excluding capital items or non-depreciable assets. Examples include specialized dental materials used in developing new treatment methods.
• Contractor Expenses: Payments made to third-party contractors for performing qualified research activities on behalf of the dental practice, capped at 65% of the total contract expenses.

It's not uncommon for dental practices engaged in R&D activities to claim credits amounting to tens or even hundreds of thousands of dollars annually. 

Frequently Asked Questions

How Far Back Can You Claim R&D Tax Credits?

You can claim R&D Tax Credits for the last 3 tax years. If your company has missed out, you still have a chance to amend past returns and get the credit. This could lead to significant savings on already completed research and development initiatives.

How Should Dentists Document R&D Expenses?

Effective documentation within dental offices is essential to maximize the value of their tax incentives. Should an audit happen, it will greatly help to smooth out the rough edges:

• Project Documentation: Maintain detailed descriptions of each R&D project undertaken. This should cover the scientific or technological uncertainties addressed, the experiments and testing conducted, and the results or conclusions derived from these activities. 
• Expense Records: Compile comprehensive records of all costs associated with your R&D activities. This includes payroll records detailing the hours employees spent on R&D, invoices and receipts for supplies purchased for research purposes, and contracts or agreements with third-party vendors involved in research activities. Make sure there is a clear link between the expenses and the R&D projects they support.

What Doesn’t Qualify for the Credit as a Dental Practice?

For the dental industry, the following operations are excluded from the R&D tax credits for dentists:

• Routine Data Collection: Standard data gathering with no underlying research or hypothesis testing does not count for the credit.
• Market Research: Efforts to improve your dental practice's marketing do not count. Research must be within the hard sciences.
• Management Functions: Administrative tasks and general business operations that do not contribute directly to research tasks.

Start Your R&D Claim - Do You Qualify?

At RevenueSafe, we explore a business’s R&D methods and expenses to ensure a compliant claim of maximum value. Our process is simple, straightforward, and easy to use. So don’t wait, take the opportunity now to save money for your business.