How Dentists Can Save Money with This Little-Known Tax Deduction
September 5, 2017
Believe it or not, dentists have a reason to smile during tax season.
A little-known tax break, the Domestic Production Activities Deduction (DPAD), allows them to deduct up to 9 percent of net income from qualifying manufacturing activities.
That’s right: Dentists can be considered manufacturers. Dental practices that develop crowns, inlays, onlays and other restoration products on-site qualify for a tax deduction similar to that used by construction companies, utilities and miners.
The DPAD encourages dentists to design, develop and produce oral products in their offices instead of purchasing them elsewhere, particularly from foreign manufacturers. It’s an opportunity for dentists to boost the domestic economy and receive a generous tax break.
The Established Precedent
In 2004, the American Jobs Creation Act effectively repealed an export tax incentive that the World Trade Organization had claimed favored U.S. producers. In replacing this incentive, the act set the groundwork for the DPAD. This deduction aims to spur manufacturing in the United States and decrease the exporting of jobs to cheaper markets in other countries.
Lawmakers crafted the deduction to encompass a wide variety of manufacturing activities. And in 2013, a California federal District Court ruled that a gift basket company qualified for the deduction because its baskets were “distinct in form and purpose from the individual items.”
This precedent established a more encompassing definition of manufacturing, allowing businesses that are not often viewed as manufacturers to qualify for the DPAD.
Generally, the DPAD is equal to 9 percent of either QPAI (the net income from eligible activities after deducting the related overhead costs) or taxable income.
Unfortunately, many dentists (and CPAs) don’t realize that certain dental procedures can be labeled as manufacturing and fall under the deduction.
Once you’ve determined that your dental practice is eligible, investigate what qualifies. Placing and cementing a crown, for example, counts as long as the product was made in-house. Making any dental products using ceramic reconstruction equipment is classified as DPAD-authorized manufacturing.
Within the dental industry, the milling process — which shapes materials such as crowns, inlays, outlays and other restoration products for proper fitting — constitutes an act of manufacturing.
The catch? In order to qualify for the deduction, you need your patient in the chair while the restoration product is being milled. You can’t take an impression for the product and send it to a lab; instead, your patient must leave the office with tangible manufactured property.
The Bottom Line
Leaders in the dental space will understand the technology and skills required to create dental restoration products. With this deduction, the IRS has effectively acknowledged that, as well as your commitment to boosting the national economy. To take advantage of this tax break, reach out to your CPA to learn more about how to calculate overhead costs, gross receipts and other determining factors.