Kelly J. Bullis: Ransoms to unlock computer not deductible expense?

Kelly Bullis

Kelly Bullis

Now here is a weird problem. Recently, the Colonial Pipeline on the East Coast was shut down by cybercriminals. It caused a major amount of headaches for folks who couldn’t find a gas station that wasn’t out of gas due to that pipeline shutdown.
What we know apparently happened, was somebody in that pipeline company opened one of those now famous false emails telling you that your bank account has been frozen, or your Social Security payments have been stopped, or your car insurance has been canceled, or you have an online fax from somebody, or your stimulus payment has been held up, or your Microsoft account has been temporarily shut down, etc., etc., etc.
In every case, you need to click a link or open an attached file. Those cybercriminals are clever. They make these look so real, that they are designed to get you to mistakenly click on stuff before you stop yourself and question the authenticity.
So, once that employee’s computer was “infected,” because they had access to the company network, the whole network got quickly infected. Then, eventually, the cybercriminals figured out they had a “big fish” on the end of the line, encrypted the entire company database, software, etc. and demanded they pay a ransom to get the key to open their stuff back up.
In the meantime, all the computer-controlled pipelines, switching stations, pumps, etc., were shut down. Voila! The gas shortage began.
Now some of my sarcastic friends were convinced that the same folks who caused the now-famous toilet paper shortage caused this. They showed pictures of people with every type of container known to mankind, including garbage bags, full of gas in their trunks. But naw! I don’t believe it. People wouldn’t do that would they?
Here's the real kicker. The company eventually paid the ransom so they could open back up. It was a reasonable alternative. They were loosing millions every day by being shut down, and the growing liability from potential lawsuits was growing if they didn’t quickly begin to fulfill their contractual obligations. Such lawsuit settlements would be a deductible tax expense.
But wait! The IRS looks at ransoms differently. They consider them to be illegal payments like bribes or kickbacks, thus making the ransom payment to get your computer back most likely NOT tax deductible. This is just the icing on the cake for this sorry story. The poor company had a great business reason for paying the ransom, which was way less than the cost of being shut down, but the IRS will most likely tell them they don’t get to deduct that against taxable income.
So, if you happen to find yourself is a similar predicament, remember to factor in the potential NON-deductibility of any “ransom” you pay to the cybercriminals.
Did you hear? Prov 17:8 says, “A bribe is a precious stone in the eyes of him who gives it; wherever he turns, he prospers.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 882-4459. On the web at Also on Facebook.


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