Friday, December 14, 2012

Preliminary Thoughts on 2.3% Medical Device Excise Tax

We're starting to see much of the same confusion from dentists concerning their read of the final regulations on the 2.3% medical device tax as they had from the proposed regulations.

First and foremost, we have not read the final regulations yet, however, we have seen a few editorials summarizing the regulations and quite frankly it doesn't sound like there is much difference as it relates to dental practices. However, after we do read them, we'll post back if there are any substantial differences we find. So the following comment is based solely on our reading of the proposed regulations along with other editorials written by well-versed professionals and their interpretation of the final regulations.

Here is the position we've taken with ALL of our clients as we go through our year end planning meetings (which is why I have very little time to read the final regulations at this time):

Generally, the dental practice itself will NOT need to directly deal with the medical device tax. Even the milled Cerec crowns may not need the dental practices to track and pay the excise tax for manufacturing the crown, we'll reserve final comment until we read the final regulations ourselves. However, ALL dental practices will be impacted by this new tax as their upstream vendors, supplies, producers and manufactures will have to pay the tax and as already noted, they will certainly pass the cost onto the dental practices.

In my opinion, the cost associated with this new tax should only warrant an increase in practice fees similar to what they have done in prior years and were planning to do in 2013.

For example, if an item that they sell to the practice for $100 is subject to the tax, they will have to pay $2.30 on that item. So they may sell you that item for $103 to cover their additional costs. Consider this when deciding how much to raise your fees:

Suppose a practice does $1,000,000 in revenue with $600,000 in total OH leaving you with $400,000 in profit. Of that $600,000 OH, $150,000 is lab and supplies. Let’s pretend every bit of it is deemed a medical device. If your upstream vendors increase their prices by 3% to cover the additional cost, your lab and supply cost will now be $154,500.

So now your total OH is $604,500 or 60.45%. This means you will now have profit of only $395,500. How much would you have to raise your fees to cover that cost? Well, your revenue will now need to be $1,004,500 to get BACK to $400,000 in profits. 

So my math says that's a fee increase of .45%

You should still consult with your CPA as well. 

Happy year-end tax planning!

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