One of the biggest hurdles to embracing technological change—including the IoT and beyond—is figuring out how to pay for it: 31 percent of surveyed manufacturers rank budget and resources as their biggest challenges to applying IoT capabilities.
Yet, while 79 percent of manufacturers say they are investing in the IoT, only 43 percent are planning to claim IoT-related tax credits and investments. The rest may be leaving money on the table.
Last year, over 6,000 manufacturers claimed an estimated $10 billion in R&D tax credits, with each manufacturer’s average benefit exceeding $1 million. But that number could be much higher.
Designed to encourage investment in innovation, R&D tax credits offer manufacturers significant benefits, equaling up to an average of 10 percent of qualified spending. In general, federal and state R&D credits are available to businesses that attempt to develop or improve the functionality or performance of a product, process, software or other component using engineering or the physical, biological, or computer sciences to evaluate alternatives and eliminate uncertainty regarding the business’ capability or method to develop or improve the component or the component’s appropriate design. In addition, more than 35 countries offer often more generous incentives for similar activities and investments.
“The objective of R&D credits and incentives is to incentivize exactly the type of progress manufacturers are trying to achieve. Qualifying activities don’t need to be flashy or revolutionary, or even succeed. If you’re trying to make products, processes or software better, faster, cheaper or greener, you probably qualify.” - Chris Bard, tax partner and R&D practice leader at BDO
In December 2015, the Protecting Americans from Tax Hikes Act (PATH Act) expanded and made permanent the federal R&D tax credit, thus putting an end to its tumultuous history of repeated expirations and renewals at the eleventh hour. In addition to expanding the credit to benefit startups and small businesses, this allowed tax executives to include the credit in their long-term business planning without concerns about expiration.
Still, a little more than a year after the PATH Act went into effect, more than half (57 percent) of manufacturers are not planning to claim tax credits and incentives for their IoT investments. More than a third (37 percent) aren’t aware R&D credits are available to them.
For the 20 percent of those surveyed that are aware of R&D credits but are not planning to claim them, a quarter (25 percent) believe the expected benefit is too small, while another 23 percent expressed concern about the cost to claim the credit.
Notably, the percentage of respondents not claiming R&D credits because they don’t believe they are doing any qualified activities dropped significantly year-over-year, shrinking from 24 percent to 16 percent. It is important to note that most R&D credits don’t require activity to be groundbreaking to qualify, or even that the activity succeed.
“The reality is that most manufacturers are still struggling with the transition to Industry 4.0. Many are still relying on legacy infrastructure that can’t integrate with IoT devices and applications or modern security protocols. The factory of the future must be built on a sound foundation.” - Eskander Yavar, partner and national leader of BDO’s Management Advisory Services practice
In our view, the IoT is just the tip of the spear. It’s what manufacturers will be able to do with a whole new layer of data—transmitted and received in real time via wireless and sensor-enabled systems—that will revolutionize the way products are made and sold. Combining data-driven insights with the technology manufacturers can now deploy on factory floors—in the products they design and across the supply chain—is set to spur a manufacturing renaissance. But starting on the path to transformation is easier said than done, especially when it’s new terrain.
Meaningful progress and innovation start with a comprehensive plan that considers both risks and opportunities. The winners of the fourth industrial revolution will be those that think about tomorrow, today.