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Find cure for medical device tax

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in Small Business Tax,Small Business Tax Deduction Strategies

There’s a little-known tax provision in the Patient Protection and Affordable Care Act (PPACA) that may directly or indirectly affect businesses with connections to the health care profession.

Alert: The PPACA imposes a 2.3% excise tax on manufacturers of most medical devices. The cost of the tax may be effectively passed on to physicians and other health care providers or institutions.

The IRS recently issued final regulations and supplementary guidance on the medical device tax. (TD 9604, Notice 2012-77) It has also posted Frequently Asked Questions.

Generally, the PPACA provision follows the Food and Drug Administration (FDA) definition of a medical device intended for use by humans. Therefore, medical devices ranging from tongue depressors to pacemakers are included, but certain other items are excluded under FDA rules. But biologics, devices intended solely for use by animals, software updates or sales of software and most home medical equipment devices aren’t subject to the new excise tax.

Key exception: Retail items purchased by the general public for individual use are exempted. Notice 2012-77 treats a device as a retail item if

  (1) it is regularly available for purchase and use by individual consumers who are not medical professionals and

  (2) its design indicates that it’s not primarily intended for use in a medical institution or by a medical professional.

Also, a “facts and circumstances” test will be used to examine if a medical device is exempt from the tax because it is intended primarily for retail use.

Note: A medical device purchased by telephone or online that requires minimal assistance or training from a medical professional, or none at all, is also exempt from the tax. Although the excise tax doesn’t apply to the sale of a domestically produced “convenience kit” including a taxable medical device, the tax will be assessed against a manufacturer or importer when that device is sold.  

Tip: Semimonthly deposits are generally required if tax liability exceeds $2,500 for the quarter.

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