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The MPI Internet of Things Study, sponsored by BDO
, evaluated the readiness of U.S. manufacturers to incorporate smart devices and embedded intelligence within their plants and into their companies’ products. The study was conducted by The MPI Group and sponsored by BDO. In August and September 2015, 350 manufacturers participated in the study. For additional study findings and information on the respondents, view the executive summary
“Manufacturers agree that IoT is a groundbreaking opportunity for advancement in the manufacturing industry. But they have some catching up to do in order to maximize IoT’s potential. Shoring up network security and taking advantage of the newly permanent and enhanced R&D credit are critical steps.”
- Rick Schreiber, Partner and National Leader of BDO’s Manufacturing & Distribution Practice
Manufacturers Play Catch‑Up with IoT Opportunity
The Internet of Things (IoT) is not just a buzzword; it’s already a reality. For manufacturers, it’s a critical opportunity. The ability to connect devices, equipment, cars and even people to collect, send and respond to data is the new frontier in manufacturing. IoT is already impacting nearly every industry, and the revolution is just beginning. Research firm Gartner predicts that 6.4 billion devices will be connected to the Internet by the end of this year, and Cisco forecasts 50 billion devices will be online by 2020.
The MPI Internet of Things Study, sponsored by BDO, found that manufacturers see IoT as a strategic imperative for their businesses, but few are ready to capitalize on it. With an estimated economic impact of more than $11 trillion over the next five years, IoT is an opportunity manufacturers can’t afford to pass up.
Despite the fact that nearly two-thirds of manufacturers believe that IoT will increase their profitability, data exclusive to BDO finds that they are lagging in two critical areas to maximize their IoT opportunities: cybersecurity and research and development (R&D) credits.
Cybersecurity Readiness Needed
With billions of devices becoming connected over the coming years, manufacturers must acknowledge that they will be exposed to ever-growing cybersecurity threats. In fact, the U.S. Department of Homeland Security reported in January that investigations of cyber attacks on the manufacturing sector nearly doubled in the year ended Sept. 30, 2015.
The stakes are high. According to a FireEye study
on cybersecurity, 97 percent of companies report experiencing a data breach, with the average cost being $3.5 million.
Despite this, only 8 percent of manufacturers report that they are very confident in their current cybersecurity protections to prevent an IT breach. Security challenges are becoming more prevalent across all industries, but particularly for manufacturers who are pushing full steam ahead to upgrade their production processes and evolve their products. Last year, the BDO Manufacturing RiskFactor Report
found that 86 percent of manufacturers cited risks related to data security in 2015, up from 78 percent in 2014.
In the midst of these concerns, nearly half of manufacturers (45 percent) do not have or are unsure if they have an information security policy in place addressing Internet-connected devices that are not used as a computing or communications platform. Moreover, 44 percent do not have or are unaware as to whether or not they have the ability to detect and identify unauthorized Internet-connected devices.
“The ability to detect and manage a data breach is critical for manufacturers in order to protect their intellectual property, as well as their employees’ and customers’ privacy. As manufacturers move to a more connected way of doing business, they need to be mindful that with more access points come more opportunities for hackers to infiltrate the network, making it imperative that companies embed security into IoT products and services from design through distribution. Assessing risks and considering the exploitability of cybersecurity vulnerabilities in all products is vital.”
- Shahryar Shaghaghi, National Practice Leader for Technology Advisory
R&D Tax Credits are Underutilized
Just 17 percent of manufacturers say they are planning to claim tax credits and incentives for their IoT investments, meaning most manufacturers are missing a significant tax savings opportunity.
The R&D credit, modified and extended permanently at the end of last year, is one of the most beneficial tax-planning opportunities to save—and even generate—cash and reduce effective tax rates. Still, every year, billions of dollars in credits go unclaimed because many companies don’t realize that they are eligible. The truth is that manufacturers have a myriad of activities—related to both IoT innovations and more traditional product and system improvements—that can qualify.
For those manufacturers not planning to claim credits and incentives for IoT investments, nearly half (45 percent) say the reason is a lack of documentation. Only 11 percent of respondents cite concern about the associated costs as their primary reason for not claiming the credits.
Smaller manufacturers may not realize they also stand to benefit. For taxable years beginning after 2015, smaller companies may now claim credits against their alternative minimum tax and up to $250,000 of their payroll taxes. This change greatly expands the range of the credit’s benefit. Now startup companies and others, who in the past couldn’t use the credit because it could be used only against regular income tax liability, can benefit from it.
John Brandt, President of The MPI Group, rightly notes, “The IoT era is here—even if many manufacturers aren’t ready.”
Getting ready for IoT certainly means developing a sound strategy for product, service and system enhancements, aligned with customers’ current and future needs. But getting ready for IoT also means taking stock of current IT systems and processes, assessing any security vulnerabilities and planning for additional exposures that will no doubt come when more devices are connected. To make the most of your investment, it’s wise to explore opportunities to take advantage of lucrative R&D credits to offset the costs or, in some cases, generate additional cash.
“Manufacturers that attempt to develop or improve software or sensors or other IoT components can leverage federal and state R&D tax credits, which can equal more than 15 percent of eligible qualified spending. And although documentation is useful to support these credits, courts have ruled repeatedly that oral testimony can be used to support them as well.”
- Chris Bard, Tax Partner and R&D Tax Practice Leader at BDO
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