In today’s environment, where high-net-worth individuals and families face increasing security risks, private security has become an essential component of many family office operations.
Family offices should keep in mind, however, that the IRS has specific rules governing the deductibility of these expenses, which differ from other standard family office costs.
Under Internal Revenue Code (IRC) Section 132, certain private security costs can be excluded from an employee’s taxable income and deducted by the employer if they meet strict compliance standards.
This article outlines how family offices can structure and document private security expenses to help them remain compliant and increase tax efficiency.
What Qualifies as Deductible Private Security?
To be deductible under IRC §132, private security expenses must qualify as “working condition fringe benefits.”
This means they must be:
- Necessary for business
- Properly documented
- Supported by a legitimate security risk
1. Necessary for Business
The expense must be directly related to the business needs of the family office. Examples include:
- Security for a family member who oversees investment strategy
- Protection of a residence used for board meetings or business functions
- Secure transportation for business-related travel
Note: Security for family members with no business role or for personal properties not used in business operations does not qualify.
2. Properly Documented
The IRS requires a clear paper trail to support the business purpose of the expense. Recommended documentation includes:
- A formal written security policy
- Third-party risk assessments
- Logs of guard schedules, travel itineraries, and system maintenance
- Invoices, contracts, and internal memos explaining the rationale
3. Supported by a Legitimate Security Risk
It should be noted that a vague or assumed threat is insufficient. The IRS expects:
- A professional risk assessment by a qualified third-party consultant
- Evidence of specific threats, e.g, public exposure or prior incidents
- A security plan tailored to the identified risks
Without this, the IRS may view the expense as personal, even if it appears business-related.
There are many companies that specialize in the risk assessment as well as security plans, and family offices should make sure the one they engage is familiar with the IRS expectations.
Examples of Qualifying Expenses
- Home security systems (alarms, surveillance cameras)
- On-site security personnel (guards, patrol services)
- Secure transportation (professional drivers, armored vehicles)
- Cybersecurity services (firewalls, secure communication tools)
- Emergency response systems (panic buttons, satellite phones)
These services must be directly linked to the family office’s business operations or the protection of individuals essential to the business.
Compliance Requirements for Family Offices
To help ensure these expenses are deductible and not treated as taxable income to employees, family offices must follow a structured compliance process:
- Third-Party Risk Assessment: A qualified consultant must evaluate and document specific threats.
- Written Security Policy: Outline the scope, rationale, and implementation of all security protocols.
- Detailed Documentation: Maintain logs of guard schedules, travel itineraries, and system maintenance.
- Annual Review: Reassess security needs annually to help ensure continued justification.
Common Pitfalls to Avoid
Even well-meaning family offices can make mistakes that jeopardize deductibility, such as:
- No Formal Risk Assessment: Without third-party validation, the IRS may view the expenses as personal.
- Blurring Personal & Business Use: Security for vacation homes or nonessential family members can lead to disallowed deductions. This can be especially tricky for family offices that work with both business and personal lifestyle management for family members.
- Lack of Documentation: Failing to maintain logs or written policies weakens the defensibility of the expenses.
Best Practices for Family Offices
To help stay compliant and protect deductions, family offices should:
- Engage a qualified security consultant to assess and document threats.
- Develop a formal written security policy outlining all security measures.
- Track usage of security-related services, including logs for drivers and travel.
- Review and update security needs annually.
- Keep a centralized compliance file with all documentation.
- Maintain an audit trail with invoices, contracts, and internal memos.
Conclusion
Private security is a legitimate and often necessary expense for family offices, but it must be approached with care. By following IRS guidelines under IRC §132 and implementing strong documentation and governance practices, family offices can help ensure these expenses are both defensible and deductible. If you have any questions or need assistance, please reach out to a professional with Forvis Mazars Private Client.
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