The R&D Tax Aspects of Advertising Science



By and


        Advertising will always have an artistic element. However, new entrants to the industry and many existing players are disrupting the traditional advertising model, primarily through mobile phone and digital applications, supported by big data and predictive analytics. These new market entrants are using advertising science to directly engage the consumer. The new advertising disrupters have large research and development budgets and leverage R&D tax credits to support the technology-based charge.



The Research & Development Tax Credit

        Enacted in 1981, the federal Research and Development (R&D) Tax Credit allows a credit of up to 13% of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent. On January 2, 2013, President Obama signed the bill extending the R&D Tax Credit for 2012 and 2013 tax years. As of this writing, it is anticipated that the R&D Tax Credit will be extended, perhaps with additional tax incentives for startups.



The Context of Big Data

        The advertising industry has long relied on data to make decisions and measure the effectiveness of campaigns. As more data collection methods have become available, many firms have begun focusing on 'Big Data.' Big Data is defined as large data sets that are too large and complex to be analyzed by conventional means.

        Many advertisers, both large and small, have departments dedicated to Big Data analysis, often headed by a Director of Analytics. These professionals apply advanced quantitative concepts to their data, including multivariate analysis and sophisticated algorithms. These individuals tend to be highly educated in technical fields such as mathematics and software engineering.

        Business intelligence is thus now being supported to a much more sophisticated degree by scientific discovery, thanks to a new class of staff who are the scientists of the business world. When a firm engages in Big Data analysis, it brings an unprecedented scientific rigor to its decision making. The basic principles of the scientific method, which include hypothesizing and experimentation, are fundamental to the R&D tax credit.

        A 2013 Infogroup Targeting Solutions survey of more than 400 marketing professionals found that 88% of marketers surveyed had plans to invest in big data solutions within the next five years, with 54% having already done so. The survey also found that the most significant barrier preventing companies from utilizing big data was budget limitations. However, companies can use the R&D Credit to ease the financial costs of investing in data related activities, as R&D related wages, contract research expenses, supplies, and software costs can qualify for the credit.



The Use of Predictive Modeling Analytics

        For years, firms have developed models to try to reflect human behavior. Added computing power and data processing capabilities continue to support modeling of increasing complexity, allowing analysts to consider more variables and choices in their analyses and to construct models with subcomponents that provide greater precision within one's results.

        Predictive analytics can help advertisers estimate key data items, including which websites a consumer is likely to frequent, which group is likely to be responsive to a particular advertisement, the estimated lifetime value of a customer, and customer retention rates. These models and analyses can factor in the decision making process for advertisers by helping them determine which ads to show to a particular consumer, which special offers to offer to that consumer, and the frequency of those offers and advertisements.

        Numerous studies have been performed to show the effectiveness of using predictive analytics in advertising, A recent AberdeenGroup study estimated that organizations that use predictive analytics are nearly twice as likely to identify high-value customers and make the appropriate offers to that segment as organizations that don't. As the effectiveness and efficiency of predictive analytics becomes more evident, companies and industries are increasingly turning their focus towards these data collection and analysis methods to better understand consumer behavior. It is estimated that the predictive analytics market will reach $6.5 billion by 2019, with the retail, insurance, financial services, pharmaceutical, and telecom industries seen as the key drivers for growth in the upcoming years.

        Predictive analytics has become widespread on the internet, as companies are monitoring consumer behavior online in hopes of better understanding shopping habits and the ways consumers use the internet to shop. Notable examples of online predictive analytics include:

  • Amazon.com's 'Related' section, which shows products that are similar or complimentary to products that the user recently viewed.
  • Travel companies using information on consumer habits and reviews to offer suggestions for future travel destinations and ideas.
  • Walmart using online behavior data to understand how a person's experience and internet browsing patterns affect their in-store behavior, and vice-versa.


Advertising Companies / Advertising Science


Book per Capita R&D Expenses

advt science table 1



Digital and Mobile Ad Boom

        It is estimated that global ad spending will increase by approximately 20% from 2014 to 2018, with a significant amount of that growth coming from projected increases in digital and mobile ads. Tech-giants Google and Facebook see this as a potential opportunity, as both are building internal advertising agencies.8 Facebook's internal agency, called The Creative Shop, employs 70 staff and has a presence in 14 countries.9 The company has also announced plans to develop a mobile-ad network that can be used in conjunction with the large amount of data it collects from users. Approximately 50% of Facebook revenues are from mobile advertising, and it is believed that this move will give the company more bargaining power in its future revenue-sharing deals with publishers.10 Google's The Zoo employs approximately 100 staff and works with brands to effectively utilize data collected from Google's search engine and YouTube to effectively target consumers.

global spending

SOURCE: Financial Times; Available at http://www.ft.com/cms/s/0/440c1f46-bfdc-11e3-9513-00144feabdc0.html#axzz2zdfjGETg

       
Other notable companies that have recently announced plans to enter in or expand operations in the field include Twitter (which recently acquired MoPub, the world's largest mobile ad server for $350M), AdRoll (a retargeting advertising platform company which recently received $70M in venture capital funding to expand into mobile advertising), and CPXi (a digital ad company which received $30M in funding). These companies, among others, have positioned themselves to take a bite out of the future industry growth.



Conclusion

        Research and development is not a term that in the past was often associated with the advertising industry. Technological advances in recent years have changed the way the industry works, with big data and predictive analytics leading the way. Companies that engage in these activities are well positioned to take advantage of substantial research and development tax credits.

Article Citation List

   


Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Raymond Kumar is a CPA and Tax Manager with R&D Tax Savers.


Similar Articles
The R&D Tax Credit Aspects of Blockchain for Supply Chains
The R&D Tax Credit Aspects of Physical Security Technology
The R&D Tax Credit Aspects of Driverless Cars
The R&D Tax Credit Aspects of SaaS Start-Ups
The R&D Tax Credit Aspects of Emotion-Recognition Technology
The R&D Tax Credit Aspects of AI in the Insurance Industry
The R&D Tax Credit Aspects of Emerging AV Trends
Enhanced R&D Tax Credits for Specialized Co-Shared Spaces
Ethereum's Impact on Digital Contracting Creates R&D Tax Credit Opportunities
The R&D Tax Credit Aspects of Geofencing
The R&D Tax Credit Aspects of Distribution Center Automation
The R&D Tax Credit Aspects of Law Firm Artificial Intelligence
The R&D Tax Credit Aspects of Avionics
The R&D Tax Credit Aspects of Telemedicine
State & Local Tax Jurisdictions Address Media Streaming and Cloud Services
Federal Government Provides Faster Approvals and Tax Credits for Consumer FinTech Products
The R&D Tax Credit Aspects of Voice-Activated Software
The R&D Tax Credit Aspects of Artificially Intelligent Hedge Funds
The R&D Tax Credit Aspects of LiDAR
The R&D Tax Credit Aspects of Educational Technology (EdTech)
The R&D Tax Credit Aspects of Cyber Security Start-Ups
The R&D Tax Credit Aspects of Construction Industry IoT
R&D Tax Credits Provide New Opportunities for Artificial Intelligence Start-Ups
The R&D Tax Credit Aspects of NYC Start-Ups
The R&D Tax Credit Aspects of Virtual Reality Technology
The R&D Tax Credit Aspects of Water Analytics
The R&D Tax Aspects of Artificial Intelligence Robo-Advisors
The R&D Tax Credit Aspects of Natural Language Processing (NLP) Innovation
The R&D Tax Credit Aspects of Video Compression Technology
The R&D Tax Credit Aspects of Automated Coding
The R&D Tax Credit Aspects of Payment Technology
The R&D Tax Credit Aspects of Restaurant Technology
R&D Tax Credits and the Second Wave of Cloud Adoption
The R&D Tax Aspects of Data Storage Startups
The R&D Tax Credit Aspects of Cyber Security
The R&D Tax Credit Aspects of Mobile Applications
R&D Tax Credits for the Modern Insurance Industry
The+R%26D+Tax+Credit+Aspects+of+the+Internet+of+DNA
The R&D Tax Credit Aspects of Modern Dental Labs
The R&D Tax Credit Aspects of IoT Communication
The R&D Tax Credit Aspects of Bitcoin and Blockchain Technology
The R&D Tax Aspects of Near Field Communication
The R&D Tax Aspects of the New FDA Mobile Apps Requirements
Tapping the Power of Big Data and R&D Tax Credits for Utility Companies
The R&D Tax Credit Aspects of the Medical Software Industry
The R&D Tax Aspects of Computer Enabled Human Identification
The R&D Tax Credit Aspects of New York City's Engineering Education and Googlization
The R&D Tax Credit Aspects of Software Modeling Analytics
The R&D Tax Credit Aspects of Logistics Software and Process Innovation
The R&D Tax Aspects of Cameras of the 21st Century
The R&D Tax Credit Aspects of Network Security
R&D Tax Aspects of DNA Identification
R&D Tax Credit Aspects of Cyber Security and Homeland Protection
Financial Product Trading Platform Artificial Intelligence R&D Tax Credits
Gig City Startups and R&D Tax Credits
The Internet of Things Creates R&D Tax Credit Opportunity
The R&D Tax Credit Aspects of Mobile Banking Applications
The R&D Tax Credit Aspects of In-Image Advertising
R&D Tax Credits for Hybrid Call Centers - Airline, Hotel, and Car Rental Industries
The R&D Tax Aspects of Data Science
R&D Tax Aspects of Radio Frequency Identification
The R&D Tax Aspects of Advanced Driver Assist Systems
The R&D Tax Aspects of the Internet of Residential Things
The R&D Tax Aspects of Web Television
R&D Tax Credit Aspects of Medical Robotics
R&D Tax Credit Aspects of Industrial Robotics
R&D Tax Credit Aspects of Service Robotics
Yes Alice, Patents and R&D Tax Credits Remain Available for the Internet of Things!
How Salesmen Can Use R&D Tax Credits to Sell Today's Software Products Engagements
The R&D Tax Aspects of Cloud Computing
The R&D Tax Credit Aspects of Hybrid Call Centers for Health Insurers
Now Every Business is a Software Business
The R&D Tax Aspects of Robot Software
The R&D Tax Aspects of Machine-to-Machine (M2M) Innovation
The R&D Tax Aspects of Financial Technology Services
Beacons Create R&D Tax Credit Opportunity
Fast Growth of Sharing Economy Impacts Tax Reporting
The R&D Tax Credit Aspects of Retail Technology
The R&D Tax Credit Aspects of Improving Virtual Reality Technology
The R&D Tax Credit Opportunities for Mobile Devices
The R&D Tax Credit Aspects of Wearable Technology
The R&D Tax Aspects of Big Data
R&D Tax Credit Fundamentals
Los Angeles Tech Boom Creates Large R&D Tax Incentive Opportunities
The R&D Tax Aspects of Software Development