The R&D Tax Credit Aspects of Geofencing



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Geofencing
        Geofencing is a relatively new phenomenon geared to use Global Positioning System (GPS) to strategically build virtual boundaries around designated locations. The predecessor of Geofencing is beacons, which can now be used jointly to further enhance a business’s marketing capabilities. Beacons were instrumental in changing the way retailers, event organizers, transit systems, enterprises, and educational institutions interact inside indoor venues.  Retailers especially benefited from beacons, despite their inherent limitations. For example, hardware, applications, and minimal distance between beacons and mobile devices are required to convey advertisements and promotional offers to users.  

        Now, Geofencing eliminates the need for additional hardware, instead reaching anyone within a larger, designated radius that can take any shape. In the realm of marketing, Geofencing creates more advertising opportunities in larger regions than ever before. For more precision, Geotargeting is useful, because it targets locations based on different parameters, such as city, zip code, and individual user preferences.  

        Endeavors in research and development for Geofencing are now eligible for federal and state research and development tax credits.


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 December 18, 2015, President Obama signed the bill making the R&D Tax Credit permanent. Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax and start-up businesses can utilize the credit against $250,000 per year in payroll taxes.


Replacing Beacons with Geofences

        Mobile devices trigger events through applications, such as text messages or push notifications, when that device crosses a Geofence. Trigger events can be sent to a Geofence when a mobile device enters or leaves the radius via a cellular network, Wi-Fi, or GPS. Beacons, on the other hand, are less precise. A beacon is a Bluetooth Low Energy (BTLE) hardware device that transmits a non-pairing signal to the application that a mobile device user has running.

        Communication about location is received by the application when the mobile device picks up a beacon’s broadcast. Once the mobile device identifies the signal, it can be translated to an estimated distance to the beacon.  The only way a signal for a mobile device is noted is if the mobile device has Bluetooth enabled. Otherwise, the beacon will not work as intended.

        Beacons and geofences are useful in different applications. For micro-locations, beacons are more advantageous. However, if a company is seeking to spread its reach on a macro level, then geofences are more beneficial. A beacon requires additional hardware and is effective for close proximity—less than a 50 meter radius. Geofencing, on the other hand, works best in large geographic areas, over 50m, and is static, which means it cannot be moved around. This may be a pitfall for Geofences as beacons can be moved around. For example, a beacon can be put on a train, thus working regardless of it being moved from one destination to the next.3

        Research and application indicates that beacons will not be completely replaced by geofences. A 2014 Business Insider Intelligence report predicted that the number of installed beacons would grow 287% over the next several years.  Similarly, a 2017 Search Engine Watch report indicated that only 22% of businesses use “hyperlocal targeting tactics, like Geofencing, to their full potential.”  These statistics demonstrate that while beacon adoption is on the rise, Geofencing is also increasingly popular for its extended services.

        So how do most businesses decide which to pursue? It was found that most enterprises employ Geofences first, and then move towards beacons.  This helps the company determine how to leverage the use of this new technology. We are seeing more and more the adoption of a combination of beacons and Geofences.


Incorporating Geofences with Beacons to Maximize on Benefits

        Geofences and beacons are used in conjunction in several marketing and retail applications. This combination can facilitate customers to purchase something before driving to the store. For example, a Geofence around the perimeter of a restaurant can notify the on-location staff about the distance of the customer who ordered something online. The beacon would work on location, as a means to notify the staff when the customer is at the restaurant. This way, the staff can ensure the order is ready for pickup.6  

        Beacons and Geofences also work together in attracting crowds of shoppers. The Geofence can be set up outside a store that delivers personalized offers and advertisements to passing customers. Once the customers go into the store, beacons take over and provide useful product information and reviews about the items the customer is approaching. Retail stores can take beacons a step further by placing them at cash registers.6 This way, the phone can automatically pull up coupons so the customer does not have to spend time searching for them on his/her email.


Brands Incorporating Beacons with Geofences

        Various retailers are now implementing beacons and geofences within their borders to attract more customers.

GameStop
        Since 2015, GameStop has been testing Geofences and beacons in over 36 stores. GameStop implements in-store technology to enhance lines of communication with customers in the area to save the business of physical software, consoles, and other gaming devices. The Geofence works with the PowerUp application that loyalty members have on their phones. It notifies customers about products and deals in store when they are in relative proximity.  Once inside the store, beacons take over and work with the application to greet the customer and give him/her messages about the products.

        Sales increased during this testing period, which suggests that beacons combined with Geofences is in fact beneficial to the implementing retailer. Software sales increased by 5.8% during the holiday period.

Elle Magazine
        For its 30th anniversary September Issue, Elle Magazine decided to take a different approach to enhance retail businesses. The magazine incorporated Geofencing and beacon technology into its application called ShopNow! The editor’s product picks are now available on the mobile applications ShopAdvisor and RetailMeNot. The Geofence works in such a way that when a person with the application is near a retail store selling one of the products suggested by Elle, he/she receives a notification, prompting him/her to purchase the item.6
       
        When that consumer enters the designated retail store, he/she receives a notification with a promotional offer. It was proven that, because of the ShopNow! program, there was an influx of 500,000 in-store visits and over 12% content engagement  with participating retailers.


Woolworths Supermarkets
        Woolworths is an Australian-based supermarket that incorporates Geofencing and beacons to enhance consumer experiences when shopping for groceries. It implements a click-and-collect service that works through its mobile application.

        With click-and-collect, consumers can select the groceries they want to purchase. Then, the in-store staff are notified when an order is made and how far the consumer is from the store. This way, the purchase order can be prepared and ready for the customer by the time he/she arrives at the location. This is where Geofencing comes into play.     Beacons are then used to notify the consumer when an order is ready for pickup while they are on location.6

        Another way beacons are employed is to target consumers within a certain radius from the store. The beacon sends a message to the consumer, asking if he/she would like to pick up the online order. It will also help determine a pickup time.  


Geotargeting

        Geotargeting is a more precise way to target customers than was previously possible with beacons and Geofences. Geotargeting does not merely reach people within a certain range. It goes beyond the boundaries to reach highly targeted mobile users based on location, interests, and general online behavior.  It was indicated that 95% of retail, restaurant, and automotive campaigns are considered geo-precise because of their advanced usage and reliance on precision targeting.

        Another way Geotargeting is employed is in a concept called geoconquesting. In this model, competitors build Geofences around competitor locations to steer potential customers away from the competitor and towards the fence owner. In this respect, when users are near a competitor’s location, advertisements for the Geofence implementer are broadcasted instead of those for the competitor.

        Geo-precise targeting is an up and coming advancement for digital marketing campaigns, guaranteed to increase a company’s competitive advantage in a market so saturated with an abundance of competitors.

        Because Geotargeting has the ability to target larger locations based on various parameters, it can be useful to target people within a city’s boundaries, but also within a radius surrounding the city. The difference between Geotargeting and Geofencing is that Geofencing creates digital advertising opportunities within a defined area. Geotargeting can be used to target and deter mobile users from going to competitors that do not fall within a predefined Geofence.2 Companies like Starbucks utilize Geotargeting and Geofences to urge customers to go to their locations instead of competing coffee and tea shops.


Geofencing in Management Applications

        Geofencing is beneficial in several management settings. Below is a list of some common applications:

        I. Drones: Particularly popular in sporting events, a Geofence can act as a temporary no-fly zone to prevent drones from crossing into the defined perimeters.

        II. Fleets: This usage is popular for truck or boat transportation. A Geofence will alert a dispatcher when the vehicle driver breaks away from the predetermined route.

        II. Human Resource Management: When employees are given a smart card, a security card with an embedded identification chip, and enter unauthorized locations that are Geofenced, an alert is sent to security.

        III. Compliance: Items that cross Geofences will be documented to determine if they comply with established policies.

        IV. Asset Management: In the event that an employee or individual attempts to take a device that is not theirs out of the designated Geofence, then an administrator can monitor the device and lock it down to prevent it from being used. This application is most common in hospitals, to protect patient confidentiality on hospital-owned devices such as iPads.

        V. Law Enforcement: Ankle bracelets and other wearable technologies that go outside of a Geofenced location will alert authorities of the wearing individual’s actions. This is most common when placing someone under house arrest and he/she attempts to leave the designated premises.

        VI. Home and Hotel Automation: When a homeowner leaves the house with their smartphone, the Geofence knows to lower the thermostat to its pre-defined temperature. This feature is also common in modern hotels, to ensure that air conditioning units do not run continuously in rooms that the user, with their smart room keys, are not currently in.


Current Uses of Geofencing

        Various companies are now integrating geofences into their operations in order to improve a product or service.

Uber
        Since 2014, Uber has been pioneering Geofencing techniques, namely around airports. Privately hired car services, such as Uber, are not licensed to pick up passengers at airports. Therefore, they decided to pursue Geofencing outside of designated pickup areas. Now, Uber drivers can wait for their fares.  Although this is beneficial for Uber to remain a competitor in the airport passenger market, it hinders some drivers to receive fares because there is no queuing system. As a result, some receive fares while others must wait longer.

        Uber suggests that it will create more efficient traffic flow with Geofencing, primarily because it can ferry passengers to and from airports while monitoring the number of cars entering and departing a designated area.  

Yik Yak
        This mobile application is often used to let people anonymously post messages. Anyone on the application within 1.5 miles of the post can see it, reply and vote on it, and chose whether to push it up or down on the list. This application grew in popularity around school districts, ranging from middle schools to high schools and universities. Unfortunately, because this application allows anonymity and freedom of speech, users can say whatever they want without facing repercussions. This became a source of harassment in educational settings.

        Yik Yak was determined to remain in business and maintain its reputation but also prevent harassment from occurring on its platform.  Therefore, it turned to Geofencing. With Geofences, it has the ability to block people using the application near schools. Therefore, “barring the use of campus Wi-Fi to view or post” on the application is a way to keep it afloat.  Amongst its safeguards, Yik Yak specifically developed Geofences around middle and high schools to prevent its use. The Geofences are not inherent around universities, however if the universities would like to, they can build their own Geofences to prevent Yik Yak usage.

Apple
        Now that a majority of the new generation walks around with smartphones, namely iPhones, it is easier for parents to track their children’s every move.

        Parents can employ the Find My Friends application on every iPhone to track their child. Geofence-based notifications can be configured to alert a parent when a child enters or leaves the designated area.  

        Although to view someone’s location both users must have consent to share their locations, there are parental controls that help parents prevent children from disabling the application and location sharing. The use of Find My Friends does have some limitations. For example, parents can only set one Geofence at a time. Apple did this purposely because it did not want the app to be abused by people tracking others—they wanted it to merely benefit those being tracked.

        The limitations inherent with Find My Friends are expected, because after all, this is a free application. However, parents wishing to pursue more concrete tracking of their children can purchase Footprints for iPhones, which is $3.99 per year.14 With this application, parents can see location history, configure Geofences, and even track children as they drive or are driven to determine if they break the speed limit in designated zones.

        Safely Drive and Locate are two other applications that alert people about each other’s activities. With Safely Drive, the system senses if a car is being driven. If it is, the sensor shuts down the phones texting and communication abilities so that young drivers are not distracted when driving. Within the same family of applications is Safely Social Monitor, another application that parents can use to check on a child’s use of social networking applications and ensure they are not engaging in poor or negative activities.  

Best Buy, McDonald’s, and Victoria’s Secret
        These three companies implement Geofences to target potential customers near store locations. However, instead of creating Geofence-based advertisements through their mobile applications, these companies have their advertisements relayed from the Pandora radio application.15 Thus, if a customer has the Pandora radio app running on his/her phone, advertisements from the nearby Best Buy, McDonald’s, or Victoria’s Secret venues will be broadcasted.


Implications in Choosing a Geofence Provider

        There are several aspects to be considered when choosing the appropriate software or company to develop personalized Geofences.  First, it is important to understand the shape and radius compatibility of the software. Only being able to create circular Geofences can be rather limiting. An area you wish to monitor may be in the shape of a triangle or rectangle, but circular Geofences will be more challenging to accurately encompass and monitor this zone.

        Furthermore, if the vendor does not permit the user to create custom sizes, then the user may develop a Geofence that encompasses an entire city instead of just his business. Geofencing software that only permits a user to create large fences limits the ability to go from macro to a micro-location analysis. Micro-locations may be more beneficial to some users than others that employ Geofences.

        Another question that must be addressed is how many locations can be monitored at a time. Many providers only permit the user to address up to 20 Geofenced areas at a time. This is not beneficial for users targeting a larger base employing countless Geofences. Pulsate Engage is one tool that actually permits a user to review an unlimited number of locations simultaneously.

        A Geofence user should be able to conduct reverse Geocoding with the Geofence provider. In other words, a business must be able to give the provider a list of location addresses that the vendor can quickly and easily convert into latitude and longitude coordinates. This speeds up the process for Geofence setup. As a result, this automates the creation of all fences in designated locations.

        Being able to bulk Geofences, specifically around competitors, is a significant advantage of any Geofencing provider. This feature would save the user time and resources because it ensures that all competitors within various Geofences are monitored and addressed in the same way.

        A Geofence provider that offers its services through hardware purchases raises a red flag. This is one of the significant differences between Geofences and beacons, because beacons require some sort of hardware to function. The Geofence provider, on the other hand, should only integrate a plug-in into the user’s mobile application. In this regard, a smartphone is all the hardware one needs to create, monitor, and monitor Geofences.

        As discussed with many existing Geofences, it is common that a Geofence works only when an application is opened. However, finding a provider that does not require the user’s application to be opened will greatly benefit the user and his/her business. With Geofences that work passively, a user does not need to have the application open to receive targeted ads and promotional offers when in range. Applications are running passively in the background of a phone, even when the application is terminated or the screen is off. Even when the application is killed, the mobile application’s SDK is restarted in the background whenever the user crosses a Geofence. A provider that expedites this process is more advanced and will help its users reach more potential customers, even when customers do not have the user’s application running.

        As we experience when using our mobile devices, GPS tends to drain devices of their battery life. Finding a Geofencing provider that minimizes battery drainage is going to be beneficial in the long-run. If customers realize their battery is drained from having the application open in the background, they will uninstall it. This will negatively affect the business, because it would no longer broadcast promotional offers and send notifications to users when in Geofenced locations. As one can see, too much dependency on GPS will cause negative repercussions for customers as well as the business employing the Geofences.


Geofencing can Eradicate Security Concerns

        It is probable that now Geofencing can be employed to alleviate some of our concerns regarding security and compliance. As previously mentioned, real-time analysis of Geofences can enhance the ability of emergency services to pursue efficient and effective fleet management and even dispatch the nearest team to trauma sites. This creates better response time because valuable dispatch time is not compromised by having to search for information such as contact numbers of those on duty.

        In work sites, IT administrators can employ Geofences to ensure worker productivity and security, especially with the upcoming growth of BYOD policies in modern businesses. Geofencing can decrease user distraction without limiting the control and usage of devices by the user. For example, security and privacy restrictions can prevent cameras from being used in the office, phones from going off in discussion or meeting rooms, and social media applications from influencing worker productivity.  

        Whereas Geofencing can be utilized to promote security and privacy features, it is also important that Geofences have elaborate security features that protect data and prevent unconstitutional access to data.

Security and Privacy Concerns of Geofences
        Before jumping to conclusions that Geofences are an invasion of privacy, it is important to note that one of the primary reasons Geofencing was made is to prevent constant tracking of individuals. Constant tracking is a true overstep of privacy boundaries. With Geofences, when parents track children or elders, they are only notified in the event the child or elder leaves the Geofenced region. Otherwise, the parent has no ability to view and track the individual’s every move.

        Geofences were successfully used in Japan in 2015, thus demonstrating its power and importance in minimal human tracking. In Japan, 12,000 dementia patients were deemed missing. With Geofences, all patients, except for 479, were found and brought back to their families and facilities.  This is indicative of 97% of patients being rescued, while the remaining 3% were marked as deceased. This is an incredible success rate, all while not being considered a breach of privacy.

        Various other applications of Geofencing are used to relocate lost items, pets, family members, and livestock. For example, in Australia, Geofences prevent cow rustling from occurring. Cow rustling is a form of stealing cattle. Moreover, in the Netherlands, Geofencing is used to identify and locate stolen vehicles. Although these applications are considered a version of tracking, Geofencing is not as intrusive as more traditional, technological tracking techniques, thus promoting safety and protecting our privacy.

        Regardless, consumers and smartphone users are still concerned with their privacy rights. Having GPS systems embedded in smartphones ensures that every user is carrying a tracking device in his/her pocket, without a choice. There is no “good way for consumers to understand who is collecting their information, how it’s being done, and why it’s being done.”15 The thing with Geofencing is that it gives the government and Geofence owners the ability to track our every move, whether it is sitting at home watching TV or going to Church on Sunday.

        Because Geofences shed light on so many characteristics about individuals, it is necessary that the fences are crafted to be non-intrusive. In other words, the user must be given the option to opt in or out of offers and location-based notifications from the application employing Geofences. The companies employing Geofences must maintain their level of trustworthiness, which means their Geofence-based applications must be targeted to the individual without being intrusive or overdoing the alerts and notifications stimulated by crossing in and out of Geofenced areas.


Conclusion

        Geofencing is a growing and popular tool in digital marketing campaigns. Coupled with beacons and Geotargeting, a business employing Geofencing can gain a significant competitive advantage in the marketplace, as well as Research and Development tax credits and incentives.

        Geotargeting is beneficial in providing data-driven, user specific push notifications to a user within a broader Geofenced location.  Geotargeting is currently employed by Facebook, for example, which provides users with advertisements that are relative to his/her proximity to the advertised business.

        Whereas Geotargeting is used to reach users in a broader area with other data concerning preferences or demographics, Geofencing is useful for users nearby a store or venue employing general advertisements and promotional offers. Beacons are most often used to reach users in more confined spaces, such as aisles in a store or museum exhibits. Geo-targeting relies on IP addresses for specificity, while Geofences are determined via GPS coordinates, and Beacons are applicable only through Bluetooth technology.

        Finally, a common difference between the three is location accuracy. Geotargeting does not require intense location accuracy because other preferences are accessed to better refine targeting. For example, a Geotarget may only address vegetarian women in New York City between twenty and thirty years old. Geofences, on the other hand, offer some accuracy in locations, and usually will target users passing through an area and purposely going to a location. Lastly, beacons are highly specific. When used in stores, they can tell a customer exactly where to go and what aisle to find a specific product in.19

        Geofences have replaced the ability of various technologies and applications in security, tracking, and privacy measures. This is an emerging technology that has the capability to enhance business sales in digital campaigns, promote productivity in work places, keep track of children and elderly family members, and ensure overall consumer satisfaction. It has the potential to replace the existing usage of RFID tagging  and traditional beacon usage, as well as create new avenues for development in innovative Geofencing software, tools, and application. These research and development efforts are now eligible for R&D tax credits.

Article Citation List

   


Authors

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

Chloe Margulis is a Tax Analyst with R&D Tax Savers.

Steve Kelly is a Tax Analyst with R&D Tax Savers.


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