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Navigating allowable and disallowable expenses in Malaysia can be tricky, especially when determining which costs are tax-deductible and which aren’t. Misclassifying expenses can result in penalties, audits, or lost opportunities to reduce taxable income.
According to industry insights, expense misclassification is one of the leading causes of tax audits and penalties for SMEs. Here’s what Malaysian business owners need to know about managing expenses effectively. Knowing the difference can help you maximize tax deductions, avoid fines, and maintain accurate financial records.
What Are Allowable and Disallowable Expenses?
The Income Tax Act of 1967 defines which expenses Malaysian businesses can claim as deductions.
- Allowable Expenses: These are wholly and exclusively incurred in producing taxable income.
- Disallowable Expenses: These are personal expenses, capital in nature, or unrelated to business operations.
Allowable Expenses in Malaysia
Below are common allowable expenses in Malaysia that businesses can deduct to reduce taxable income:
1. Employee-Related Expenses
- Salaries, wages, and bonuses
- EPF, SOCSO, EIS, and HRDF contributions
- Staff training and development
- Employee medical expenses (within reasonable limits)
Tip: Keeping detailed payroll records ensures these deductions remain valid during audits.
2. Rental and Utilities
- Office, warehouse, or shop lot rental
- Utility bills (electricity, water, internet)
- Maintenance and repair costs for business premises
Example: The rent is fully deductible if you run an online store from a rented warehouse.
3. Professional Services
- Fees paid to accountants, auditors, lawyers, or company secretaries
- Consultancy fees directly related to business operations
Tip: Engaging a licensed company secretary like Altomate helps ensure compliance — and these fees are deductible.
4. Marketing and Advertising
- Digital ads (Google, Facebook, TikTok)
- Website development and maintenance
- Graphic design, branding, and content creation costs
Example: Promoting your e-commerce store through paid ads is considered an allowable expense in Malaysia.
5. Business Travel Expenses
- Flight tickets, accommodation, and meals for business trips
- Local transportation costs such as taxis or Grab rides (related to business)
Important: Personal travel expenses disguised as business costs are not deductible.
6. Office Supplies and Equipment
- Stationery, printing materials, and office essentials
- Computers, printers, and tech equipment used for business
- Software subscriptions directly related to your business operations
Example: Tools like Xero, QuickBooks, or SQL are deductible if used for business.
7. Insurance Premiums
- Business liability insurance
- Keyman insurance (insurance for key company personnel)
8. Bad Debts (Written Off)
- Unrecoverable debts from clients or customers may qualify as deductible expenses if properly documented.
9. Repairs and Maintenance
- Repairs to office equipment, machinery, or property used in business operations
- Routine maintenance costs to keep assets functional
Important: Property improvements or upgrades are considered capital expenses and are not deductible.
Disallowable Expenses in Malaysia
The Inland Revenue Board of Malaysia (LHDN) generally disallows the following expenses:
1. Capital Expenditure
- Purchase of fixed assets like machinery, vehicles, or property.
- Costs for property renovations or upgrades.
Exception: While capital expenses are non-deductible, they may qualify for capital allowances.
2. Personal Expenses
- Clothing, entertainment, or meals unrelated to business.
- Family vacations or non-business-related travel.
3. Fines and Penalties
- Parking fines, speeding tickets, and penalties imposed by authorities.
- Late tax filing penalties.
Important: Even if these fines relate to your business, they are not tax-deductible.
4. Donations (Unless Approved)
- Charitable donations that are not made to government-approved organizations.
Tip: Donations to approved charities can be deducted. Refer to LHDN’s approved list of eligible organizations.
5. Entertainment for Non-Business Purposes
- Excessive client entertainment or entertainment for personal enjoyment.
- Only reasonable business-related entertainment can be claimed.
6. Pre-Incorporation Expenses
- Expenses incurred before your company’s official incorporation date.
Exception: Some expenses, such as professional fees paid for incorporation, may qualify for deductions.
7. Life Insurance for Directors
- While Keyman Insurance is deductible, personal life insurance for directors or owners is not.
Best Practices for Managing Allowable and Disallowable Expenses in Malaysia
To stay compliant with LHDN regulations and maximize your deductions:
- Maintained detailed records for all expenses.
- Ensure that business and personal expenses are separated.
- Consult a qualified accountant or tax advisor for guidance on complex costs.
- Accounting software like Xero, QuickBooks, or SQL can be used to track costs efficiently.
How Altomate Can Help
Understanding allowable and disallowable expenses in Malaysia can be challenging. At Altomate, we specialise in business accounting, tax planning, and compliance support to help you manage costs effectively.
Whether you’re a startup or an established business, our expert team ensures your finances are optimized, compliant, and stress-free.
Get in touch with Altomate today to keep your business expenses on track.
