In this guide
Does dermatology work qualify for the R&D tax credit?
Some of it does. Most of a dermatology practice's work is established care, and that work is out. The credit sits in the share where your team develops a treatment protocol, device setting, formulation, or diagnostic method under real technical uncertainty and evaluates alternatives to resolve it.
Work that follows the manufacturer's settings or the published standard of care usually has no technical uncertainty, so it does not count. Adapting an existing treatment to one patient's needs does not count either, so qualifying work is usually aimed at a class of patients or cases. It also has to meet all four parts of the test.
The credit concerns how the technical work was done, not clinical results.
How does the four-part test apply to dermatology?
Each protocol, technique, or method has to pass all four parts of the IRS test in Section 41(d), applied to dermatology work.
- 01
Permitted purpose
The work aims to create a new or improved function, performance, reliability, or quality in a treatment protocol, a device workflow, a formulation, or a diagnostic method.
- 02
Technological in nature
It relies on biology, chemistry, physics, or computer science, such as photobiology, pharmacology, or imaging science.
- 03
Elimination of uncertainty
At the start, the practice does not know whether or how an approach will work, often for refractory disease, first-use device settings, or conditions with no standard of care.
- 04
Process of experimentation
Alternatives are evaluated systematically, through documented case series, parameter iteration, and benchmarking, not routine use of established protocols. Substantially all of the work has to be part of that process.
What does qualifying dermatology R&D look like?
Three illustrative examples, each written to show work that can meet all four parts of the test.
A combination protocol for refractory eczema
A dermatology group developed its own sequencing protocol for patients with refractory atopic dermatitis, combining a biologic with phototherapy where no published protocol covered the combination.
The team evaluated alternative sequences and intervals across a documented case series, tracking each version of the protocol.
Energy device settings across skin types
A practice set out to establish RF microneedling and laser parameters for darker skin types, where the manufacturer's guidance did not establish settings it could rely on for safety and performance.
Clinicians iterated energy, depth, and pulse settings under a structured plan and recorded each round.
An in-office dermoscopy scoring system
A practice built a structured dermoscopy scoring method to prioritize lesions for biopsy, then validated it against biopsy results.
The team compared alternative scoring criteria and revised the method as validation data came in.
Which dermatology activities qualify?
Where dermatology work usually lands, and the records that support it.
| Activity | Why it may qualify | Records | Status |
|---|---|---|---|
| Combination therapy sequencing | Developing sequences of biologics, devices, or both for refractory disease where no published protocol predicts the result can qualify. Choosing a treatment for one patient does not. | Records: Protocol versions, iteration logs, case series records | Can qualify |
| Compounded formulation work | Developing a base formulation for a group of patients, by varying actives, excipients, and vehicles to reach a stability, delivery, or performance target, can qualify. Adjusting a formulation for one patient's prescription does not, and neither do changes made only for scent, color, or other style preferences. | Records: Formulation records, response data | Can qualify |
| Energy device calibration | Developing settings for a group of skin types where the manufacturer's guidance does not establish the right parameters can qualify, especially when the goal is safety or performance. | Records: Parameter logs, adverse event tracking | Can qualify |
| Diagnostic scoring methods | Dermoscopy and other diagnostic scoring methods built on skin biology and validated against known results, such as biopsy findings, can qualify. Routine data collection and patient surveys do not. | Records: Scoring versions, validation cohorts | Can qualify |
| Imaging and lesion mapping software | Software the practice builds for clinical use, such as lesion mapping, is generally tested under the same four-part test. Software built for back-office functions faces a higher bar under the internal-use software rules. Buying a vendor tool, or setting it up as designed, usually does not count. | Records: Requirements, version history, accuracy testing | Depends on facts |
| EHR workflow configuration | Can count where the practice develops new software, such as an integration, and the work meets the four-part test. If the software serves back-office functions, it also faces the higher internal-use software bar. Switching on a vendor module or building templates usually does not count. | Records: Architecture notes, test results | Depends on facts |
| Routine treatment delivery | Established protocols with predictable results carry no technical uncertainty. | Records: Not applicable | Excluded |
| Billing, scheduling, and marketing | Management functions and marketing are excluded by law. Software built for these back-office tasks usually falls under the stricter internal-use software rules. | Records: Not applicable | Excluded |
What dermatology practice costs count toward the credit?
Three kinds of spending carry almost every dermatology claim. Wages are usually the largest.
Wages
Time dermatologists, physician assistants, nurses, and clinical staff spent on development work, and the people who directly supervised or directly supported it.
Supplies
Compounding ingredients, device consumables, and other materials used up in development and testing.
Contract research
65% of what you paid outside firms for qualified research done on your behalf, under an agreement made before the work, when you pay whether or not the work succeeds and have a right to the results.
A credit can offset tax dollar for dollar. A $100,000 credit can offset up to $100,000 of income tax. Claiming it also reduces your research deduction by the same amount, or the credit can be taken at a reduced amount instead, so the net gain is less than the full credit. Most practices are pass-throughs, so owners see the benefit on their own returns.
When development work happens during procedures that patients or insurers pay for, an examiner may ask whether those payments fund the research. How that plays out depends on the facts.
How does an R&D study work for a dermatology practice?
Four steps, built around how your clinical team already works.
- 01
Discovery call
Thirty minutes to size the likely credit and the strongest expense categories for your practice.
- 02
Clinical interviews
Dermatologists, physician assistants, and clinical staff describe the work in clinical terms. We find the experimentation inside it.
- 03
Credit calculation
Both federal methods are run, and development time is separated from routine patient care.
- 04
Filing support
A package your CPA can file from, with the records needed to support the claim if the IRS asks questions.
Common questions from dermatology practices
Can a dermatology practice really qualify for the R&D tax credit?
Many can. The credit is not limited to labs or manufacturers. Practices that develop their own treatment protocols, device settings, or diagnostic methods under real technical uncertainty may have work that can qualify and has never been claimed.
Does work for an individual patient count?
Usually not on its own. Adapting an existing treatment to one patient's needs is excluded. Work can count when it develops or improves a protocol, setting, or method, which in practice usually means work meant for a class of patients or cases.
Our CPA stopped claiming the credit after 2022. Should we look again?
It can be worth a second look. Section 174A lets businesses deduct domestic research costs in the year they are paid or incurred, for tax years beginning after December 31, 2024, instead of spreading them over five years. Years from 2022 through 2024 still follow the older rules, with some transition choices, and some of those choices had deadlines that have now passed. Your CPA will know which options apply to your returns.
Can a practice claim the credit for years it already filed?
Often, yes. Years that are still open, usually the last three, can be claimed on an amended return, and the credit can produce a refund only to the extent it reduces tax already paid. Partnerships under the federal partnership audit rules file an administrative adjustment request instead, and the partners generally see the benefit on a later year's return rather than as a refund for the earlier year. The payroll tax option for small businesses has to be chosen by the return's due date, including extensions, so it is usually not available for past years.