A corporation approves a $150,000 executive security program. That figure goes into the budget, the board minutes, the proxy statement. Everyone treats it as the cost.
It isn't. A $150,000 security program that hasn't been documented the way the tax code requires can cost the corporation more than twice that in an ordinary year, and far more in the year the company is sold. The gap has nothing to do with the security itself. It comes from how the IRS treats it.
The default rule, briefly
Under §61 of the tax code, income means income from whatever source. When a corporation pays for a residential alarm, a security driver, or a close-protection detail, the IRS treats that spending as compensation to the executive. It goes on the W-2, and it's taxed like salary.
There's one way out. §132(a)(3) excludes "working condition fringe benefits," meaning things the executive could have deducted as a business expense if they had paid out of pocket. Treasury Regulation §1.132-5(m) sets the terms on which executive security qualifies. The mechanism that gets a corporation there, without standing up a full 24-hour protective detail, is an Independent Security Study: an outside, objective report that, done correctly, lets a narrower program receive the same tax treatment as a full overall security program. We've written separately about how that study works. This post is about the bill a corporation runs up without one.
What a $150,000 program really costs
Start with the $150,000 and watch what attaches to it.
| What the corporation pays | Amount | When it applies |
|---|
| The security program | $150,000 | The budgeted figure |
| Gross-up on the executive's tax | about $123,000 | If the employment agreement requires the company to cover the executive's tax |
| Lost deduction above the pay cap | up to $31,500 | If the executive is a covered employee over the §162(m) limit |
| Lost deduction on parachute payments | up to $210,000 | On a sale, if continued security pushes the executive past the §280G threshold |
In an ordinary year, a public corporation with a gross-up obligation is looking at roughly $300,000 in real cost for a $150,000 program. In the year the company changes hands, §280G can add six figures more.
The executive's tax bill comes first
The chain starts with the executive, even though the corporation ends up holding most of it.
If the security benefit can't be excluded, its full value goes on the executive's W-2 as ordinary income. Put $150,000 there for an executive in the top federal bracket, layer in a representative state income tax and Medicare, and the combined marginal rate sits near 47%. The executive owes roughly $71,000 a year in tax on security they didn't ask for and, in many cases, didn't want. In California or New York City, closer to $80,000.
A corporation could leave that bill with the executive. Most don't.
Then the corporation grosses it up
A gross-up provision obligates the company to cover the executive's tax on a company-provided benefit. It's common in senior employment agreements, and it's where the cost quietly compounds.
The compounding happens because the gross-up payment is itself taxable income. The company pays the executive's tax, then pays the tax on that payment, and so on down the line. At a 45% combined rate, grossing up a $150,000 benefit costs about $123,000 on top of the original $150,000. The corporation has now spent roughly $273,000 to deliver a $150,000 program. At California rates, the all-in figure clears $300,000.
This is the largest line in most years, and it's worth saying plainly: the corporation is paying nearly double the sticker price and getting nothing extra for it. The executive is no safer. The program is no larger. The difference is pure tax friction, and it exists only because the program was never documented.
One qualifier. Gross-up clauses have fallen out of favor, and many agreements signed in the last fifteen years dropped them under shareholder pressure. Where there's no clause, this $123,000 doesn't reach the corporation, and the $71,000 stays with the executive instead. Worth checking which case the company is in before assuming.
The lost deduction
For a public corporation, there's a cost that has nothing to do with gross-ups.
Section 162(m) caps the deduction a public company can take for compensation paid to a covered executive at $1 million a year. Covered employees include the CEO, the CFO, the next three highest-paid officers, and, under a rule in place since 2017, anyone who has ever held that status. Compensation above the cap is paid with after-tax dollars.
Security that isn't excluded under §132 counts as compensation here. If a covered executive already earns $1 million or more in cash, a $150,000 security program sits entirely above the cap. The corporation can't deduct it. At the 21% corporate rate, that's $31,500 a year it would otherwise have kept.
The One Big Beautiful Bill Act, enacted in July 2025, tightened this further. For tax years beginning in 2026, the $1 million cap applies across an aggregated controlled group rather than company by company, with the single cap allocated among related corporations. For a business inside a corporate family or a private equity portfolio, that closes structuring options that used to soften the cap. Security spending that was comfortably deductible under the old entity-by-entity math may not be anymore.
And then there's the sale
The largest number doesn't recur. It lands once, when the company is sold.
Section 280G governs "golden parachute" payments: compensation that vests or pays out because of a change in control. It works through a cliff. Take the executive's average annual W-2 compensation for the five years before the deal and call that the base amount. If the total change-in-control payments reach three times that base amount, the law claws back hard. Everything above one times the base amount becomes an "excess parachute payment," carrying a 20% excise tax on the executive and, for the corporation, a lost deduction on the same excess.
There's no phase-in. A package one dollar under the 3x line triggers nothing. A dollar over, and the whole amount above 1x base is exposed.
Security spending feeds the problem directly. If a corporation commits to continuing an executive's protection after closing, and that security was never excluded under §132, it can count as a parachute payment, adding to the total measured against the 3x line.
Here is how thin the margin can be. An executive has a base amount of $500,000, so the 3x cliff sits at $1.5 million. The deal puts $1.4 million of cash severance on the table, comfortably under. Then the corporation agrees to keep $100,000 of post-closing security in place. That tips the total to exactly $1.5 million, and the cliff triggers. The excess parachute is $1 million. The executive owes a 20% excise tax of $200,000, and the corporation loses its deduction on the full $1 million, a $210,000 cost at the corporate rate. A $100,000 security commitment just generated more than $400,000 in combined tax, and complicated a deal term in the process.
Documented properly, that post-closing security is a working condition fringe benefit, not a parachute payment. It never enters the calculation.
What the corporation is actually carrying
Put the lines back together. A public corporation with a gross-up obligation spends close to $300,000 a year to run a $150,000 security program, once the gross-up and the lost §162(m) deduction are counted. If the company is heading toward a sale, §280G waits at the end with a six-figure cost on top.
None of that spending buys better security. It's the price of not having the one document that recharacterizes the program. An Independent Security Study is a one-time fee, and it's a fraction of a single year's excess cost. Set it against a number like $300,000 a year, recurring, and the comparison isn't close.
The harder part isn't the math. It's that the cost stays invisible until something surfaces it. A corporation carrying an undocumented program usually isn't doing anything wrong operationally. It's carrying a quiet liability that comes due on a schedule it doesn't control: the next audit, the next proxy statement, the next change of control.
The documentation is the asset
Be precise about what fixes this. It isn't more security, and it isn't less. What an executive needs is a question for a threat assessment, and the honest answer might be a residential alarm and monitoring, or it might be a full close-protection detail. The tax exposure is identical until the program is documented.
What changes the picture is an Independent Security Study that meets the regulation's terms: conducted by a genuinely independent consultant, built on objective analysis, recommending what the facts support, and implemented as written. That document is what moves executive security from compensation to working condition fringe benefit. It's what an auditor accepts. It is the asset.
If you're working through what your company's executive security program actually costs, we're glad to talk it through. An initial conversation is enough to tell you which of these exposures apply and whether the facts support a study at all. No engagement required.
This post is for informational purposes and does not constitute tax or legal advice. The figures used are illustrative and depend on jurisdiction, contract terms, and specific facts. Readers should consult qualified tax counsel regarding their own programs.