Capitalizing on ‘IoT’ in Manufacturing: How Important is Documentation?
Undeniably, majority of us are already familiar with a number of smart devices. Powerful, sensor-equipped smart phones, for instance, have brought an unprecedented level of connectivity to our daily lives. Likewise, the Internet of Things (IoT) promises to extend sensor technology to all sorts of objects, even those that are not usually associated with the term “smart”. From a pacemaker to a coffee machine, everything will be linked together through the Internet.
Thus, the burgeoning of this fully connected world represents a unique opportunity for innovation. Throughout the nation, businesses of all types and sizes are engaged in making the IoT a reality. In effect, according to IDC, the worldwide IoT market will grow from $655.8 billion in 2014 to $1.7 trillion in 2020. Furthermore, insights from the MPI Group‘s Internet of Things Study, reveal that 76% of manufacturers will increase their use of smart devices or embedded intelligence in manufacturing processes in the next two years.
However, are companies capitalizing on all the opportunities that IoT represents? Irrefutably, the very nature of IoT is intrinsically linked to innovation. On the one hand, new products, novel business models, improved processes, and innovative interactions are bound to emerge. On the other hand, ground-breaking technological advances will be necessary before the IoT begins to realize its full potential. Either way, companies engaged in any type of IoT-related innovation may qualify for significant federal research and development (R&D) tax credits.
Nonetheless, despite approximately two-thirds of manufacturers believing that the IoT will increase their profitability, majority are actually lagging in maximising their IoT opportunities. Specifically, MPI Group’s insights highlight that manufacturing companies are overlooking substantial R&D tax credit savings. In fact, the study reveals only 17 percent of manufacturers said they were planning to claim tax credits and incentives for their IoT investments, meaning most manufacturers (83 percent) are missing a critical opportunity. For those manufacturers not planning to claim credits and incentives for IoT investments, concern about the associated costs is identified by only 11 percent of respondents. Whereas nearly half (45 percent) of manufacturers say the reason for not claiming the credits is based on a lack of documentation.
Ultimately, manufacturers can address the cost and risk of research and development by leveraging the aforementioned federal, state and local tax incentives. Indeed, planning ahead by creating an infrastructure that identifies qualifying research activities and collects contemporaneous documentation is ideal in reducing future tax liabilities and synthesizing an R&D tax credit that will be sustainable on audit examination. However, although documentation is useful to support these credits, courts have ruled previously that oral testimony can be used to support them as well. For taxpayers without detailed records, reasonable estimates based on the longstanding rule in “Cohan rule” may be allowed. Though, it is still preferential to always keep contemporaneous documentation in support of research activities.
In conclusion, the R&D tax credit is available to businesses that uncover new, improved or technologically advanced products, processes, principles, methodologies or materials. As noted above, the nature of IoT is inherently interrelated to innovation and many companies engaged in any type of IoT-based innovation may qualify for significant tax savings. While claiming the credit requires time, resources and expertise, it can also provide significant monetary and operational benefits to businesses. Nonetheless, the credit continues to be underused by qualified companies primarily because of a misunderstanding of qualification and documentation requirements for federal and state credits. Therefore, in this instance, it is best to contact that help of specialist R&D Tax Advisor to assist with your claim.
Swanson Reed’s R&D tax professionals are available to discuss the R&D tax credit – contact us today if you would like to know if your company now qualifies.