Domestic Production Activities Deduction

Does your dental practice create crowns in the office? Do your dentists use the CEREC process to create restorations? If you answered yes to either of these questions then your practice may qualify for a little known federal tax deduction. Dentists that engage in the manufacturing of restorative crowns or inlays in-office can take advantage of the domestic production activity deduction (DPAD). Although originally designed to support American manufacturing and construction companies, the IRS has ruled that dental practices may also to take the deduction. To keep our dental clients, prospects and others informed about essential tax saving strategies, Barnes Dennig has provided a brief overview of the deduction below.

 Domestic Production Deduction Activities

Introduced in 2005, the Domestic Production Activities Deduction (DPAD) provides a generous tax deduction for qualifying manufacturing and construction companies. Unlike most tax deductions, to qualify companies do not need to invest in new equipment or incur additional expenses.  The 9% deduction is based on the net income earned from qualifying manufacturing activities.

Qualifying Manufacturing Activities

There are specific rules governing what manufacturing activities qualify for the incentive, including:

  • Domestic Focus – The manufacturing process must take place in the U.S. or a U.S. territory. In certain cases, companies can take a safe harbor deduction if at least 20% of the total costs in production are related to labor and overhead costs from a U.S. based business.
  • Final Product – Production must result in the creation of tangible personal property, software, applications or media recordings for use in the U.S.
  • Production Processes – Specific manufacturing, growing, extracting, installing, building, creating or producing should be used. The IRS has provided a clear list of qualifying production processes a manufacturer must use in order to qualify.
  • Product Distribution – Activities such as the sales, leasing or licensing of domestically manufactured products also qualify.

Application to Dental Practices

While most services provided by a dental practice do not qualify for DPAD, there are a select few that do. Remember, your practice needs to use ceramic reconstruction equipment such as CEREC or other CAM/CAD technology to manufacture restorative crowns and inlays. The IRS has ruled that the milling process to shape the materials for proper fitting is what qualifies the manufacturing.

To learn whether your dental practice qualifies for this unique tax savings opportunity, click here to contact us.