Gregory Bocchinois is partner and national leader in the accounting methods and credits services practice, and Ajay Wanchoo is managing director of the accounting methods and credits services practice, at KPMG. Views are the authors' own.
The rise of ecommerce, especially since the start of the pandemic, has pushed retailers to make investments in digital transformation as they explore new ways to reach customers.
What some retailers might not know is that their return on investment can be significantly enhanced with efficient tax planning – like capitalizing on state-level research and experimentation tax credits.
In a KPMG survey of approximately 1,000 tax professionals across industries, one in three reported never having claimed federal or state-level R&E credits or other incentives even though they were eligible for them. Why is this?
Historically, companies have focused on claiming the credit for highly innovative product and process improvements as opposed to somewhat less obvious areas of investments, including information technology.
What’s more, the methodology to identify the qualifying expenses and supporting documentation is often thought to be more complex than it is in practice, but there are numerous technologies available to help automate the process.
Claiming R&E credits
The R&E tax credit is attracting attention outside of the accounting department, and with good reason. Increasingly, chief technology officers, vice presidents and directors of engineering and other retail technology leaders understand the value of these credits goes beyond just improving the organization’s effective tax rate; it’s helping them innovate to remain competitive and improve their “digital front door.” That improves the efficiency of the business and strengthens the ROI on their digital investments.
Retailers need to evaluate whether, and to what extent, their investments qualify for federal and state R&E credits. Are the projects technological, and do they entail a process of innovation, among other factors? Employee wages, research supply costs, contractor expenses, cloud computing costs, engineering and design fees, and other costs tied to the project are all eligible for the credit.
Examples of R&E initiatives that could apply to retailing:
- Automating a delivery process
- Developing sustainable and eco-friendly apparel using biodegradable material, and creating information technology systems to implement the concept of fast fashion
- Creating an app for taking a brick-and-mortar store online
- Adding drone-based delivery
- Leveraging artificial intelligence-based software to optimize supply chains
- Adding robots to warehouse management
- Developing a blockchain-based product tracking system
- Developing software to be used for internal functions by the organization including financial management and performing day-to-day activities.
Expanding the credit
The Biden Administration and U.S. Congress are considering several tax code revisions that are targeted to create jobs and boost the economy as it emerges from the pandemic. An expansion of the R&E credit is one of the options being considered.
For example, advance payments on the research credit and an increase to the amount of external research expenses that may qualify are under consideration. (Currently, taxpayers can qualify only 65% of expenses related to external applied research.)
Multinational organizations that develop software and conduct research across international borders have even more opportunities to take advantage of R&E tax incentives that are also available overseas.
As the retailing sector needs to find new ways to engage customers through a variety of formats (phone, laptop, bricks and mortar), convenience is part of the equation for successful merchandising.
Investing in digital transformation – while considering potentially lucrative tax credits – should be something for retailers to compete effectively in the new environment and, in the process, uncover new opportunities for growth.