Most doctors probably don’t think of themselves as being in the manufacturing business, but if any of your dental practice’s revenue is coming from the on-site production of crowns, in-lays and other restorations using CEREC or other CAD/CAM technology then, according to the IRS, you can take advantage of a federal tax deduction called the Domestic Production Activities Deduction (DPAD).
The IRS ruled that the milling process used to shape the materials for proper fitting is what qualifies as manufacturing. In addition, doctors who are deriving revenue from retainers, appliances or other items produced in an in-house lab are also eligible for the deduction.
A District Court case (United States v. Dean, No. 11-01977 (C.D. Cal. 2013) further expanded the deduction’s application to assembly line activities that only repackage various items or materials, none of which are produced on-site, to create a final assembled or “repackaged” product. The Dean case focused on the activities of a gift basket company; which involved purchasing various items from third parties and combining these items together in gift baskets or towers.
The court concluded that the company’s production process created gift baskets or towers that were “distinct in form and purpose from the individual items.” The company’s activities “transformed into a gift” individual items that would typically be purchased separately as ordinary groceries. Similarly, orthodontists placing brackets and wires to begin patient treatment are combining two or more purchased raw materials and using those to form a new item which is “distinct in form and purpose from the individual items.”