PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

WELTMAN: Tax Deductions for Cyber Security

By at 20 October, 2017, 11:23 am

Cybersecurity describes measures you take to protect your computer and information from unauthorized access. Concerns about cybersecurity are relatively new. According to the dictionary, the term “cybersecurity” wasn’t even in use before 1989, the first viruses started a decade later, but large-scale computer attacks didn’t make headlines until about 10 years ago.  The IRS and courts have yet to tackle specific costs related to cybersecurity measures. However, given commonly known tax rules, I think there’s some guidance to be found.

Anti-virus software

The cost of off-the-shelf software can be expensed as a Section 179 deduction. Alternatively the cost can be deducted ratably over 36 months.

The monthly fee for cloud-based solutions is also fully deductible.

Different tax rules apply to self-developed or customized software, which is something that small businesses don’t do.

Firewalls

Like anti-virus and malware software, firewall software also protects computers from incoming threats. The cost of firewalls is treated the same as anti-virus software.

Ransom paid to hackers

If you experience a ransom demand and pay it in order to unfreeze your computer, the cost may be deductible. The experts are not clear on how to claim the write off. Here are two options:

-Take it as an ordinary and necessary business expense

-Claim it as a theft loss

But the IRS could argue that it’s a nondeductible illegal payment (see Code Sec. 162(c)(2) which bars a deduction for illegal bribes, kickbacks, and other payments.

IT services

If you have in-house employees doing IT work, their compensation is deductible just like that of any other employee. If you use an outside IT service, the fees are fully deductible as an ordinary and necessary business expense.

Final thought

As cybersecurity takes a front burner for business concerns and companies invest money in addressing these concerns, expect to see IRS guidance on write-offs. Court decisions are sure to follow.

Barbara Weltman is a member of SBE Council’s advisory board, and has been a premier consultant for small businesses of every kind for over twenty years. She’s the founder of Big Ideas for Small Business and has written numerous books on small business operations, including J.K. Lasser’s Small Business Taxes, The Complete Idiot’s Guide to Starting a Home-Based Business, and The Rational Guide to Building Small Business Credit. Follow Barbara on Twitter @BarbaraWeltman

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