The knowledge on allowable and non allowable expenses in tax deduction for business is crucial to every business owner particularly the SMEs in an attempt to maximise income tax expenses without violating the income tax act 1967. Misinterpretation of what is and what is not allowable frequently creates unjustifiable exposure to taxes, audit risks, and business entity wastefulness in the business planning process.
This guide will give insights on the top 5 most expenses incurred by business which are deductible in the computation of tax and the key points to keep in mind with regards to the deductibility of the business expenses.
Under the Malaysian tax law, expenses are classified into two major groups as follows:
All expenses that are incurred in the production of gross income, which are wholly and exclusively incurred, are categorized as allowable. These are fundamental business expenditures that are directly related to revenue earning and thus they are allowed when calculating tax.
The costs that have not been borne entirely and solely to produce gross income are categorized as disallowable, that is, they cannot be deducted to determine taxable income such as private expenses and expenses with capital in nature.
The distinction between both types of expenses is important for reliable tax planning and preventive problems in the process of LHDN audit.
The following are the top five tax-deductible expenses that are mostly claimed in Malaysia.
The biggest portion of deductions that can be made is on employee expenditure. They are needed to sustain the workforce and cover the day-to-day operations.
Specific double deductions are allowed such as employing disabled staff, senior citizens, ex-convicts P.U.(A) 47/2021 or scholarship expenses for Malaysian students P.U.(A) 49/2022 with some rules and regulations.
It is noted, however, that Budget 2026 proposed modifications to some of the incentives under the category of double-deductions. Misclaims should be preventable by businesses through ensuring that the latest updates are verified.
The cost of maintaining business premises can be deducted as long as it is fully and purely incurred in the running of the business.
As hybrid and remote work arrangements are becoming the norm, portion of expenses can be claimed based on business usage
The deduction of professional fees is only allowed in cases of direct relationship between the fee and business.
There are certain restrictions on secretarial fees and taxes filing fees, and the permissible amounts should be in compliance with Garis Panduan Potongan bagi Perbelanjaan Berhubung dengan Yuran Kesetiausahaan, Yuran Pemfailan Cukai Mulai Tahun Taksiran 2022.
Expenses or costs incurred to keep existing business assets functional such as expenses to repair office equipment, machinery or property used in the business are deductible revenue expenditure.
To qualify as an allowable deduction, the expense must be revenue in nature, meaning:
If the expense improves or upgrades the asset, it becomes capital expenditure, which is not deductible. However, capital expenditure may qualify for capital allowances instead.
Expenses related to payment of insurance for business purposes such as property insurance, stock in trade insurance and insurance for employees.
One of the most commonly misinterpreted rules:
The only insurance that is suitable is insurance that specifically covers the business or employees.
The key consideration to be taken by the business in determining the deductibility of business expenses in Malaysia are listed below:
Examples include:
Any expenses under Section 39 of Income Tax Act 1967 are not deductible. This is including:
Companies need to get acquainted with these limits to prevent invalidated claims.
The learning of the allowable and non allowable expenses in taxation Malaysia assists businesses:
Companies are advised to make sure that they use the right caps and conditions in making claims. We at HL Khoo Group will guide you and provide professional consultation to ensure full compliance and maximised tax benefits.
For official tax references, visit:
Updated on : 19 November 2025
Entertainment expenses are generally only partially deductible. The Income Tax Act allows deductions for certain business-related entertainment such as meals with clients or promotional events. However, personal entertainment or expenses with no direct business purpose are not deductible.
No. Personal expenses such as private vehicle usage, personal insurance (including life insurance), and non-business-related travel are considered non-allowable expenses. Only expenses incurred wholly and exclusively for generating business income can be deducted.
Revenue expenditure keeps an asset in its original working condition (e.g., repairs, servicing) and is deductible. Capital expenditure improves or upgrades an asset or involves purchasing a new one (e.g., renovations, machinery upgrade). Capital expenditure is not deductible, but capital allowance may be claimed.
Yes, but only the portion used for business purposes. Utilities, internet, and rental can be prorated based on actual business usage. Proper calculation and documentation are important to avoid audit issues.
Malaysia