The R&D Tax Aspects of Machine-to-Machine (M2M) Innovation



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Machine-to-Machine-Innovation
        Machine-to-machine, or M2M, is a broadly-defined term to describe the computer and networking technologies that are integral to the Internet of Things (IoT); technologies that allow both wireless and wired systems to communicate with other devices of the same type. Examples of M2M systems include utility smart grid systems, logistics and tracking systems, and other monitoring and control systems. As computing power, networking, and data analysis become available to everything and anything around us, so does the opportunity for innovation in a wireless world.

The Research & Development Tax Credit

        Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent 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.

M2M in the Internet of Things

        Machine-to-machine is core to the Internet of Things - a world where even seemingly mundane products and objects can communicate to networks through on-board wireless devices. In the Internet of Things, companies and users can have total quality monitoring and control over inventories, equipment, possessions, and household products. An object with a device would capture an event and relay it through a network to an application for processing.

Machine-to-Machine Prospects

        The U.S. and China are strong and growing markets for smart devices, with smart devices and RFID both being key to the Internet of Things. The following paragraphs look at some of the prospects for innovation and growth that currently exist in M2M.

Various Markets See Potential for Growth
        In general, marketing forecasts place the value of the wireless M2M market at $196 billion in revenue by 2020, following a CAGR of 21% between 2014 and 2020. With forecasts predicting about 12.5 billion devices out there by 2020, the market opportunities and challenges will be huge regardless of where in that range the truth falls.

A New Level of Total Quality Management
        Commercial M2M is being used for inventory monitoring and control as well as asset tracking. The logistics industry makes heavy use of M2M and wireless technologies to track packages and equipment, and maximize efficiency in the fleet. As more devices become "smart", one can expect that companies will want to track and monitor new company assets.

        The industrial sector can see vast improvements contributing to total quality management techniques. Robots and other automated systems can be tagged to create monitoring and control systems that actively send and respond to changing conditions in real time.

        One example of this kind of system can be found in high tech mining operations. Ventilation-On-Demand systems work in underground meshed networks to report events that go on inside the mine, increasing safety and optimization. Miners wear an M2M sensor in their equipment that sends an alert if anything dangerous happens. In addition, should the worst happen, the M2M technologies put in place can afford a snapshot.

Conserving Resources
        In the agricultural industry, M2M products and services are used to track livestock and monitor and control the efficiency of watering, planting, and sunlight on crops. AgSense, LLC is a company based in Huron, South Dakota that provides remote monitoring equipment to monitor different conditions in crops in order to save water, resources, and power using GPS and sensor data.

        In the infrastructure industry, M2M deployment in the form of energy smart grids could use M2M technologies to reduce carbon emissions and energy use through efficient monitoring and control of electrical grids. As the Internet of Things adds newer tags, devices, objects and equipment, smart grids may be able to efficiently manage nearly all aspects of power and utility grids to meet quality and supply demands while conserving energy, carefully consuming resources, and controlling pollution and emissions. The Department of Energy is already offering incentives in various forms to innovate and implement smart grids through initiatives and task forces.

        Some companies already offer a business-level solution to facility management. Pacific Controls Inc. offers IntelliCommand software for facility management which can be used with M2M systems in order to provide around-the-clock remote facility monitoring and control - these systems work to maximize building efficiency and reduce waste.

        Across all industries, the gains in efficiency for machines, products, and assets would not only contribute to greater quality, control, and monitoring, but also contribute to reduction in greenhouse gases and carbon emissions through reduction in resource usage. The Carbon War Room has estimated the abatement of greenhouse gases to be seven times greater than the carbon footprint of the infrastructure and logistics to support it - the costs are clearly outweighed by the benefits.

Looking Good - Working Smart
        Wearables are quickly becoming a popular consumer item and are gathering a lot of attention. Wearables are mobile devices you can wear. Wearables are an emerging market, but leaders in consumer electronics have brought products to market that are developing and growing the market for these new mobile devices.

        Google, Sony, Apple, and Samsung all have big stakes in the wearable devices market. Google's Google Glass continues to make waves in building a future of augmented reality and mobile computing. Sony, Apple, and Samsung are all competing in the market of smartwatches and accessories. Google is hoping that its Android Wear platform enables innovation and new products. These devices rely on second and third party innovations and products to succeed, so application developers and product designers are both key participants of these new products. Currently, these devices work mostly with your own mobile device, but will probably move towards controlling and interacting with other devices as product lines expand.

        Intel is taking a more abstract approach to wearables by researching and developing truly wearable technology - clothes and materials that people can wear that aren't just devices or toys. Intel is working with its finance and technology partners to create garments that can gather contextual information from the area around it. Intel also hopes to expand wearable technology to allow people to harvest energy from their environment.

Networking Infrastructure Opportunities

        Considering the large amount of expected growth in smart devices and objects contributing to IoT, there are plenty of challenges that exist to be overcome in M2M network infrastructure, applications and security.

        The extraordinary amount of data generated and processed by the Internet of Things will require innovations and investments in expanded infrastructure, sensor technologies, software applications, security and control systems, as well as handling the up-front costs that currently give pause to businesses considering if M2M devices and applications would be helpful to them.

        Another of the primary challenges to widespread adoption of M2M products and services is the lack of common standards and application frameworks. The Carbon War Room discusses solutions to this and other M2M challenges in a document they researched and published in 2013. Through common standards and protocols, the market of products and services would be easier to develop for and feature interoperability between systems, networks, and across other boundaries.

Conclusion

        All of the opportunities within the machine-to-machine and Internet of Things developments described above may offer opportunities for R&D.  There may be related expenses that qualify for the Research and Development Tax Credit.  As technology progresses to shrink computing and networking devices, the opportunity for new products and services opens to anyone with the drive and vision to create them.

Article Citation List

   


Authors

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

Adam Starsiak is a Tax Analyst with R&D Tax Savers.


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