What expense category is Temporary Fencing and Site Security?

Securing a construction site is a critical responsibility. The costs of temporary fencing, on-site lighting, and other security measures are a necessary and significant expense to protect materials, equipment, and the public during a project.

However, a standard and critical tax error is to treat these costs as a simple, currently deductible operating expense, such as rent or utilities. The IRS views these project-specific security costs as an integral part of the construction process, and their tax treatment follows specific capitalization rules. This guide will clarify how to categorize these expenses to ensure your business remains compliant.

Temporary Fencing and Site Security Category

The costs you incur for temporary fencing and other security measures on a construction site are capital expenditures. They are not a currently deductible business expense.

According to the Uniform Capitalization (UNICAP) rules detailed in IRS Publication 535, businesses that produce property must capitalize all direct costs and a portion of their indirect costs. Temporary site security measures are considered an indirect cost of production that must be capitalized as part of the total cost of the property being constructed.

Important Considerations While Classifying Temporary Fencing and Site Security

The most critical factor is that these costs are tied to a specific production activity (the construction project) and must be capitalized into the project's basis.

Capitalize, Do Not Expense

You cannot deduct the costs of temporary site fencing, lighting, or other security measures in the year you pay for them. These expenses are added to the overall basis of the property you are building. For example, if you spend $10,000 on temporary fencing for a new building project, that $10,000 becomes part of the building's total cost for depreciation purposes.

Distinction from Permanent Security Systems

The capitalization rule for temporary measures is different from the rule for permanent installations.

• Temporary Security (Capitalized into Project): The cost is part of the larger asset being built.
• Permanent Security System (Capitalized as a Separate Asset): The cost of purchasing and installing a permanent security system in a finished building is capitalized as a separate asset and depreciated over its useful life, as detailed in IRS Publication 946.

The Uniform Capitalization Rules (UNICAP)

As a business that produces real property, you are generally subject to UNICAP. This means that all indirect costs that directly benefit or are incurred as a result of your production activities must be capitalized. Temporary site security falls into this category. Small business taxpayers with average annual gross receipts under a certain threshold are generally exempt from this rule.

Tax Implications and Recordkeeping

The tax treatment for these costs requires capitalization, not a standard expense deduction.

How to Report the Costs

You do not report temporary fencing and site security costs as direct expenses. Instead:

1. Capitalize the Cost: The fees are added to the basis of the property being constructed on your balance sheet.
2. Calculate Annual Depreciation: Once the building is placed in service, you calculate the depreciation deduction for the entire property (including the capitalized security costs) on Form 4562.
3. Report the Deduction: The total annual depreciation deduction from Form 4562 is then carried to your primary business tax return.

What Records to Keep

You must maintain meticulous records to substantiate all project-related costs. This includes:

• Invoices from rental companies for fencing or lighting.
• Contracts or service agreements for any temporary security services.
• Proof of payment for all related costs.

How Fyle Can Automate Expense Tracking for Site Security

Fyle helps you capture and organize all the costs associated with securing a job site, providing a clean record for your accountant to handle capitalization correctly.

• Centralized Rental Invoices: Forward and attach your fencing and lighting providers' email invoices to Fyle for automatic data capture.
• Track by Job Site: Code all site security costs to a specific construction project for precise cost allocation.
• Create a Clear Audit Trail: Fyle maintains a time-stamped, unalterable record of all project costs for substantiating your property's basis.
• Automate Your Accounting: Sync capitalized project costs to the correct fixed asset or work-in-progress account in QuickBooks, Xero, NetSuite, or Sage Intacct.