Cashing in With the R&D Tax Credit

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By Bryan Elmore, CPA, and Edward P. Dunn Jr., CPA
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Owning and operating an O&P practice is incredibly challenging. To remain competitive, practices need to attract and retain quality prosthetists, orthotists, and technicians who are able to fit and manufacture devices that are individualized for each patient. This process is part science and technology, and part trial and error. Practice owners must also endure unpredictable billing reimbursements that can strain cash flow. However, there is hope with the Research & Experimentation Tax Credit, commonly called the R&D Tax Credit. Of course the credit can't find talented employees for you, but it can provide some much-needed cash flow relief in the form of reduced income taxes.

The R&D Tax Credit became a permanent part of tax law in December 2015 when Congress passed the Protecting Americans Against Tax Hikes (PATH) Act. PATH enhanced the credit so that, starting in 2016, it could offset the Alternative Minimum Tax (AMT) for all taxpayers and payroll taxes for start-up companies.

The major difficulty for businesses claiming the credit is its ambiguity; the law was not written in a way that makes it easy to apply to an O&P practice's operations.

The credit's qualification requirement is best explained in Figure 1. To keep it simple, any activity conducted after production on the definitive device begins will not qualify for the credit. Pre-production activities start with the initial test socket or device and end after the final socket or device meets the patient's requirements.

Pre-production activities and the supplies associated with them typically cannot be billed to insurance or the patient, who only pays for the final product. However, this trial and error is a necessary process due to situations that include volume changes in the residual limb or pain associated with pressure points that must be reduced or eliminated.

In addition to the ambiguity regarding qualifying activities, the law is not easy to understand in terms of calculating the credit. The example that follows shows how the credit is calculated. This example will also help facility owners estimate the benefit amount after a review of payroll and expense records.

The R&D Tax Credit is a unique part of tax law. It requires a special set of accounting skills, including industry experience, to apply fuzzy tax law and create documentation that supports the credit. Not all accountants have the background to feel comfortable claiming the credit, but can recommend a specialty firm that can help maximize this benefit. Don't miss out. 

Bryan Elmore, CPA, and Edward P. Dunn Jr., CPA, are accountants at Koch, Siedhoff, Hand and Dunn, Wichita, Kansas. Elmore can be reached at