What expense category is Security System?

Protecting business assets, premises, and personnel is a critical concern for any company. Security systems, encompassing everything from alarm systems and surveillance cameras to monitoring services, play a vital role in mitigating risks. As businesses invest in security, accountants and SMB owners need to understand how to properly categorize the associated costs—which often include both upfront investments and ongoing fees—for accurate financial reporting and tax purposes.

This guide breaks down the classification of security system expenses and highlights key considerations.

Security System Expense Category

The correct expense category for security system costs depends significantly on whether the cost relates to acquiring the system itself or paying for ongoing services:

1. Security System Hardware and Installation

• Costs associated with purchasing and installing physical security components (cameras, sensors, alarm panels, wiring, recorders) are generally NOT treated as immediate operating expenses.
• Accounting/Tax Treatment: This hardware is considered a long-term asset. These costs should be capitalized.
• Category: Record the purchase under Fixed Assets, often in a specific sub-account like Security Equipment, or potentially as Leasehold Improvements or Building Improvements if integrated into the property structure. The cost is then recovered over time through Depreciation.

2. Monitoring Fees and Related Services

• Recurring fees paid to a security company for monitoring services, cloud storage for video footage, or guard services are ongoing operational costs.
• Accounting/Tax Treatment: These are treated as Operating Expenses, deductible in the period incurred.
• Category: Common expense accounts include Security Expense, Utilities (sometimes bundled by providers), Dues and Subscriptions, or General and Administrative Expenses.

3. Repairs and Maintenance

• Costs incurred to repair existing security system components (that don't significantly improve or prolong the life of the system) are operating expenses.
• Category: These typically fall under Repairs and Maintenance Expense.

Choosing specific categories like "Security Equipment" (Asset), "Security Expense" (Operating), and "Repairs and Maintenance" provides the clearest tracking.

Some Important Considerations While Classifying Security System Expenses

When managing security system costs, keep these factors in mind:

• Capital vs. Expense: This is the fundamental distinction. Hardware purchase and installation costs are capitalized assets recovered via depreciation. Ongoing monitoring fees and minor repairs are operating expenses deducted currently.
• Section 179 / De Minimis Safe Harbor: The cost of purchased security system hardware might qualify for accelerated expensing under Section 179 (up to annual limits) or the De Minimis Safe Harbor election (for items/invoices under $2,500 or $5,000, if criteria are met). This allows deducting the cost upfront instead of depreciating over several years.
• Ordinary and Necessary: Security system costs must be ordinary (common and accepted) and necessary (helpful and appropriate) for protecting your business assets and operations.
• Business Use of Home: If a security system covers a home that includes a qualifying home office, only the portion of the cost (depreciation for hardware, percentage of monitoring fees) allocable to the business use of the home is potentially deductible, subject to the strict home office deduction rules.
• Leased Systems: If you lease the security hardware instead of buying it, the lease payments may be deductible as Rent/Lease Expense. However, carefully review lease terms, as some leases might be treated as installment purchases requiring capitalization. Monitoring fees bundled within a lease are still operating expenses.
• Recordkeeping: Maintain detailed records, including invoices for hardware purchases and installation, contracts and invoices for monitoring services, repair bills, and proof of payment. For capitalized hardware, maintain depreciation schedules.

Examples of Security System Expenses

Security system costs typically fall into these categories:

Capital Expenditures (Hardware & Installation)

• Purchase price of security cameras (IP, analog), NVRs/DVRs.
• Alarm system control panels, keypads, sirens.
• Door/window sensors, motion detectors, glass break sensors.
• Access control systems (card readers, electronic locks).
• Initial wiring and professional installation labor.

Operating Expenses (Services & Repairs)

• Monthly or annual fees for professional alarm monitoring services.
• Fees for cloud video storage associated with security cameras.
• Costs for guard services, if applicable.
• Fees paid for routine maintenance or repairs of existing system components.

Tax Implications of Security System Expenses

Deductibility / Recovery

• Hardware/Installation (Capitalized): Costs are recovered over time through Depreciation using MACRS (Modified Accelerated Cost Recovery System). Security systems are often classified as 7-year property, though components integrated into a building might follow building depreciation schedules. Alternatively, the cost may be deducted upfront using Section 179 expensing or the De Minimis Safe Harbor election, if requirements are met.
• Monitoring Fees & Repairs (Operating): Generally fully deductible as ordinary and necessary business expenses in the year paid or incurred (subject to accounting method and prepayment rules).

Timing

Operating expenses follow cash/accrual and prepayment rules. Depreciation/Section 179 deductions begin when the asset is placed in service.

Where to Report (Schedule C)

For sole proprietors:

• Line 13 ("Depreciation..."): Report depreciation expense and Section 179 deduction (calculated on Form 4562).
• Line 21 ("Repairs and maintenance"): Report costs for repairs.
• Line 25 ("Utilities"): Monitoring fees might be reported here if bundled or classified as such.
• Line 27a ("Other expenses"): A common place for monitoring fees (specify "Security Expense" or "Monitoring Fees") or other related operating costs.

How Fyle Can Automate Expense Management

Managing both capital purchases and recurring fees for security systems requires organized tracking. Here’s how Fyle can assist:

• Capture Payments: Track recurring monitoring fees or hardware purchases made via company credit card using Fyle's real-time feeds. Manage invoices paid via other methods by attaching proof of payment.
• Centralize Documentation: Store monitoring service agreements, hardware purchase invoices, installation receipts, and payment records digitally within Fyle, linked to the relevant transaction.
• Consistent Categorization: Use Fyle to consistently categorize recurring monitoring fees and repair costs under the appropriate operating expense accounts. Flag hardware purchases for review regarding capitalization/Section 179 eligibility.
• Track Recurring Fees: Monitor monthly or annual monitoring payments for budgeting and timely payment.
• Streamline Accounting Integration: Fyle exports accurately categorized operating expense data to your accounting system (QuickBooks, Xero, NetSuite, Sage Intacct). Captured details for hardware purchases support the necessary setup for fixed asset tracking and depreciation calculations within your accounting software.

Security system costs involve both capital investments (hardware/installation) and ongoing operating expenses (monitoring/repairs). Correctly distinguishing between these is crucial for proper accounting and tax treatment, impacting depreciation schedules versus current deductions. 

Maintaining detailed records and leveraging tools like Fyle can help businesses efficiently manage these important protective expenses.