Malaysia Income Tax Deduction for Businesses

Welcome to a comprehensive guide on the latest 17 tax components that are creating waves in the business landscape. In this detailed exploration, we delve into various aspects of tax deductions, shedding light on crucial considerations for businesses operating in Malaysia. From road tax and maintenance expenses to special deductions on renovation and accelerated capital allowances, this article aims to equip businesses with the knowledge they need to navigate the intricate landscape of income tax deductions. Whether you’re a seasoned business owner or just starting, understanding these tax components can significantly impact your financial strategy and contribute to optimizing your tax liability. With these complexities in mind, follow RS 36 Solutions to delve into the intricacies of Malaysia’s tax landscape to help you navigate this financial terrain effectively.

Unveiling Tax Deductions: A Crucial Aspect for Malaysian Businesses

Tax deduction serves as a financial mechanism where certain expenses are subtracted from personal or business income, leading to a reduction in taxable income and, consequently, a lower tax obligation. Particularly pertinent to small businesses, a tax deduction represents a business expense acknowledged by the Internal Revenue Service (IRS) as an “ordinary and necessary” cost, effectively lowering the taxable income of the business.

The eligibility of ordinary expenses for deduction hinges on their alignment with common or routine expenditures within a specific industry. These routine expenses are deemed indispensable for the business’s survival and growth. Whether structured as sole proprietorships, partnerships, C corporations, S corporations, or limited liability companies (LLCs), businesses can harness deductions, commonly known as tax write-offs, when filing their federal income tax returns.

Malaysia’s Income Tax Deduction: Understanding Allowable and Non-Allowable Expenses

Common Allowable Expenses

Here is a list of common allowable items; however, it’s important to note that business expenses vary across industries. The Inland Revenue Board of Malaysia (IRB) may assess based on common industry practices, examining the purpose of the expenses and their correlation with income-generating activities. Allowable expenses include:

Employment costs (salary, allowance, EPF, SOCSO)
Business insurance
Rental of premises
Advertisement for sales promotion
Lease rental on plant and machinery
Utilities (electricity, water, telephone, internet)
License renewal
Repair and maintenance
Promotional gifts and samples
Printing and stationery
Traveling allowances
Legal fees for trade debt recovery
Staff training

Common Non-Allowable Expenses

However, some expenses are often denied tax deduction status, even if they are considered necessary by businesses. Understanding these non-allowable expenses can help companies manage and minimize such costs. Common non-allowable expenses include:

Expenses That Are Not Incurred:

Provision of expenses
General provision of bad debt
Depreciation and loss on disposal of capital assets
Unrealized foreign exchange loss

Capital Expenditure:

Pre-commencement expenses
Costs of acquiring, improving, or altering capital assets
Costs of protecting, preserving, or defending the title of capital assets
Renovation or construction costs of premises
Acquisition repair
First painting on premises
Licensing and registration expenses
Income tax, tax penalties, and costs of tax appeals
Fines and penalties
Donations
Legal fees for bank loans or premises acquisition
Entrance fees to clubs
Registration of trademarks
Fees for designing company logos

Prohibited Expenses

Expenses not wholly and exclusively incurred in the production of income
Domestic, private, or capital expenditure (Capital allowance can be claimed for capital expenditure incurred)
Lease rentals for passenger cars exceeding RM50,000 or RM100,000 per car (applicable to vehicles costing RM150,000 or less not used prior to rental)
Employer’s contributions to unapproved pension, provident, or saving schemes
Employer’s contributions to approved schemes exceeding 19% of employee’s remuneration
Non-approved donations
Employee’s leave passages
Interest, royalty, contract payment, technical fee, rental of movable property, payments to non-resident public entertainers, or other payments subject to Malaysian withholding tax but not paid
Input tax incurred by a person liable to be registered under GST but not registered
Input tax claimable by a person
Output tax borne/absorbed by a GST-registered person
Entertainment to potential customers (50% allowable)
Entertainment to existing customers (50% allowable)
Entertainment to suppliers (50% allowable)

Corporate Income Tax: Understanding Deductible and Non-Deductible Expenses in Malaysia

Deductible Expenses

In Malaysia, corporate income tax deduction is applicable to expenses wholly and exclusively incurred in the generation of profits. These expenses can be categorized into deductible and non-deductible items. The deductible expenses include:

Employee’s salaries and wages
Business/Corporate insurance
Marketing, advertisement, and promotion expenses
Employee traveling expenses
Employee entertainment and leisure expenses
Cost of office repair and maintenance
Lease rental property expenses on plants and machinery
Recruitment expenses
New talents acquisition expenses
Incorporation expenses
Business travel expenses

Non-Deductible Expenses

Conversely, certain expenses are not eligible for corporate income tax deduction. These non-deductible expenses encompass:

Fines and penalties
Licensing and registration expenses
Company’s trademark registration
Company donations and charity
Domestic, private, or capital expenditure
Employee’s contribution to unapproved pensions, provident, or saving schemes
Interest, royalty, contract payment, technical fees, rental of movable property, payment to a non-resident public entertainer, or other payments made to non-residents subject to withholding tax, where the tax was not paid

Understanding the distinction between deductible and non-deductible expenses is crucial for businesses to optimize their tax strategies and comply with Malaysian corporate income tax regulations.

6 Essential Tax Deductions for Small Businesses in Malaysia

Small business owners in Malaysia often seek ways to minimize their tax liability, and understanding various tax deductions can significantly contribute to achieving this goal. These deductions, which often correspond to ordinary business expenses, allow businesses to reduce their taxable income, ultimately retaining more funds for operational needs. Navigating through the complexities of tax regulations, however, can be challenging, leading to potential oversights of eligible deductions. This article explores the six most common types of tax deductions for small businesses in Malaysia and offers guidance on claiming them.

1. Business Expenses

Small businesses frequently incur various expenses essential for their operations. The following are typical deductible business expenses:

Supplies: This includes business-related items like paper, printer ink, computers, and shipping supplies.
Equipment: Rental or purchase costs for business-specific equipment such as copiers and vehicles.
Rent: Deductible if you rent office, manufacturing, or storage space exclusively for business purposes.
Furniture: The cost of business-related furniture, with a limit of $5,000 in deductible costs when starting a business.
Software and Fees: Expenses related to purchasing business software and fees for online platforms like Shopify.

2. Home Office Expenses

Even if your business operates from home, certain office-related expenses are deductible:

Utilities: A percentage of utility costs based on the home office’s proportionate use.
Mortgage Interest: A percentage of mortgage interest based on the home office’s dedicated space.
Telephone and Internet: Deductible if used exclusively for business, with the percentage of business use considered.
Real Estate Taxes: The business portion of real estate taxes, determined by the home office’s percentage.

3. Travel Expenses

Business-related travel may qualify for deductions if specific criteria are met:

Transportation: Airfare, bus, train, and local transportation to business-related destinations.
Lodging: Costs associated with hotels and other accommodations during business travel.
Meals: Up to 50% deduction for unreimbursed meal expenses after January 1, 2023.

4. Professional Development Expenses

Investing in professional development can be tax-deductible:

Training: Costs associated with courses, webinars, or seminars beneficial to your business.
Conference: Expenses related to attending conferences that contribute to your business development.
Reading Material: Subscriptions to trade publications and industry-related books.
Professional Memberships: Dues or fees for memberships in professional organizations relevant to business development.

5. Health Insurance Premiums

Small business owners can benefit from deductible health insurance premiums:

Personal Deductions: Deductions for health and dental insurance premiums for the owner, spouse, and dependents.
Employee Benefits: Premiums paid for employees’ health insurance coverage are deductible business expenses.

6. Retirement Plan Contributions

Saving for retirement can also provide tax benefits for small business owners:

IRA Contributions: Contributions to Individual Retirement Accounts (IRAs), including SEP IRA and SIMPLE IRA.
Qualified Retirement Plans: Contributions to plans like 401(k), which reduce taxable income on the owner’s personal tax return.

Understanding and leveraging these tax deductions can significantly impact a small business’s financial health and long-term sustainability. It is advisable to seek professional advice to ensure accurate and compliant tax filings.

Maximizing Malaysia Income Tax Deductions: Three Essential Tips

Efficiently claiming tax deductions is key to minimizing your tax liability as a business owner. Here are three valuable tips to help you maximize your tax deductions:

1. Keep Thorough Records

Maintaining meticulous records of your business expenses is crucial. Preserve receipts, invoices, and notes related to all business transactions. This documentation serves two essential purposes: it enables accurate calculation of deductions, and in the event of a tax audit, it provides valuable evidence to support your claims.

2. Seek Professional Tax Advice

Engaging with a tax professional can significantly enhance your ability to identify relevant tax deductions and accurately calculate the eligible amounts. Their expertise ensures that you navigate the complexities of tax regulations effectively. If professional advice is not feasible, consider referring to IRS guidelines specific to business expenses and deductions for additional insights.

3. Choose the Right Home Office Deduction Method

When claiming a home office deduction, you have two methods to consider: the simplified method and the regular method.

Regular Method: This approach involves calculating the actual expenses associated with your home office space. These may include utilities, mortgage interest, and other related costs.
Simplified Method: Alternatively, you can opt for the simplified method, allowing for a flat deduction of $1,500. While this method offers simplicity, it may not capture the full scope of your home office expenses.

Choosing the method that aligns best with your specific circumstances can help you optimize your home office deduction and contribute to overall tax savings.

By implementing these tips, you can strategically leverage tax deductions, ensuring you keep more of your hard-earned money while remaining compliant with Malaysia’s income tax regulations.

Exploring the Latest 17 Business Tax Components: Hot Alerts

1. Road Tax, Motor Vehicles Insurance, Repair, and Maintenance for Non-Company Vehicles

When a company incurs expenses for road tax, motor vehicle insurance, repair, and maintenance for non-company vehicles (e.g., vehicles belonging to salesmen), these are not tax-deductible unless the company declares the benefit-in-kind/perquisite in the relevant owner’s EA. It is essential to document the owner’s name in the general ledger.

Description	Tax Impact
Company’s passenger vehicle & declared BIK	All expenses are deductible.
Company’s passenger vehicle & not declared BIK	The amount of BIK will be added back in the company’s tax computation.
Non-company’s vehicle	All related expenses are non-deductible.
Vehicle brought into the company using a trust deed	All related expenses are not deductible unless the whole amount is declared as BIK.

2. Wiring Expense

Wiring expenses, such as the installation of a new machine, are not tax-deductible. However, wiring expenses under repair purposes are allowed for tax deduction. Ensure clear documentation of the nature of wiring expenses in the general ledger.

3. Small Value Assets (SVA)

Small Value Assets (SVA) Claim under Capital Allowance

YA 2019	Effective from YA 2020
Value of each asset not more than RM1,300 No restriction on total yearly claim	Value of each asset not more than RM2,000 No restriction on total yearly claim

*For non-SME, the SVAs are restricted to a total amount of RM13,000 for a year of assessment.	*For non-SME, the SVAs are restricted to a total amount of RM 20,000 for a year of assessment.

4. Repair and Maintenance Guidelines

Repairs and renewal expenses are typically eligible for deductions from an individual’s gross income derived from a business or rental source. According to Paragraph 33(1)© of the ITA (Income Tax Act), deductions are allowed for expenses wholly and exclusively incurred in the:

Repair of premises, plant, machinery, or fixtures used in the production of gross income; or
Renewal, repair, or alteration of any implement, utensil, or article employed in the production of gross income, excluding those on which the expenditure qualifies as plant expenditure under Schedule 3 of the ITA.

However, the costs associated with reconstructing or rebuilding:

Premises, buildings, structures, or works of a permanent nature;
Plant or machinery; or
Fixtures

are not deductible from gross income when determining adjusted income from that source.

In general, expenditures on repairs and renewals of assets can be categorized into revenue expenditure (allowable as a deduction) and capital expenditure (not allowable as a deduction). The distinctions are as follows:

Repairs

Revenue Expenditure (Allowed as a Deduction)	Capital Expenditure (Not Allowed as a Deduction)
Repair that restores an asset to its existing condition	Repairs or replacement with an element of improvement or renewal to the assets/altering the original condition of the assets
Repairs that allow businesses to continue	Initial expenditure or repairs on assets immediately after acquisition
Replacement of part of the entire asset	Replacement of the entire asset (entirety)
Replacement and renewals of implements, utensils, or articles with an expected life span of not more than two (2) years

It is essential to document the nature of each respective repair and maintenance clearly in the general ledger.

5. Benefit in Kind (BIK)

BIKs, or benefits in kind, are non-monetary benefits that cannot be converted into cash, either due to employment contract restrictions or inherent limitations of the benefit. This means the provided benefit, despite having monetary value, cannot be sold, assigned, or exchanged for cash. The company is required to record the pertinent benefits in kind in the employee’s EA, including instances such as company motor vehicles utilized by directors. Additionally, the relevant BIK must be factored into the calculation of the monthly tax deduction (PCB), with the BIK value being divided over a 12-month period.

a. The Prescribed value of Motorcar and its related benefits

b. The Prescribed value of Household Furnishings, Apparatus and Appliances

6. Petrol, Toll & Parking

Expenses related to non-company car petrol, when claimed through mileage reimbursement or outstation allowances per trip, are deemed allowable and do not trigger any perquisite requirements. However, full petrol bills are subject to tax under the perquisite category.

Tax planning tips include:

a) Opting for mileage-based reimbursement by submitting a claim form specifying the client and purpose of the incurred expenses. It is advisable to standardize the mileage rate for all staff or categorize it based on their levels.

Tax impact: Fully exempted as it is incurred in the performance of employment duties.

Following are sample of claim Form:

b) If claiming through petrol bills, exemption is limited to RM 500 per month (RM 6,000 per year) per employee. Any amount exceeding this limit should be declared as a perquisite in the EA Form, as the Inland Revenue Board of Malaysia (IRBM) may add back the remaining amount incurred.

Tax planning: Implementing controls to restrict each staff/director from claiming petrol expenses via bills to a maximum of RM 500 per month.

7. Ang Pow

Ang Pow distributed to employees, with a genuine intention to celebrate the festival, should be substantiated by presenting a detailed list of staff members along with the corresponding amounts paid, ensuring that the amounts are reasonable. Failure to demonstrate the festive intent may result in the Ang Pow being considered a substitute for a bonus, consequently requiring inclusion in the respective staff members’ EA Form.

It’s important to note that Ang Pow distributed to non-staff entities, such as customers or business associates, is not eligible for deduction.

8. Wages

Wages disbursed to part-time or contract workers need to be substantiated with adequate documentation, including a payslip, payment voucher (preferably via bank transfer), attendance slip, and a daily worksheet/log book if available. Additionally, the updated Form E guidelines mandate the declaration of all types of employment within the company, encompassing permanent, intern, part-time, and contract wages. It’s noteworthy that the Inland Revenue Board’s (IRB) recent audit of employer files emphasizes the necessity for reconciliation between the data submitted in Form E and the payroll information declared in the Income Statement.

9. Disable Staff

Compensation provided to disabled staff qualifies for a double deduction. To facilitate the tax deduction claims, kindly furnish the following documents and information:

Description	Documents Required
Disable staff	– Identification Card (I/C)
	– OKU card and SOCSO Certification Letter
	– Pay slip
Type of remuneration	– Wages, salary, overtime payment, commission, tips, allowance, bonus or incentives, fees, perquisite, employee’s share option scheme (ESOS), and tax borne by the employer

10. Senior Citizen / Ex-Convict / Ex-Drug Staff

Compensation disbursed to senior citizens, ex-convicts, or individuals with a history of substance abuse, who are solely employees, qualifies for a double deduction. To facilitate the tax deduction claims, please furnish the following documents and information:

Description	Criteria
Senior citizen	– 60 years old and above<br>- Full-time basis<br>- Remuneration less than or equal to RM4,000<br>- Not eligible for: employer who is an employee as well, and employer’s relatives
Ex-Convict/Parolee/Supervised person	– Served sentence of imprisonment<br>- Under Prison Act 1995<br>- Must obtain written confirmation from Malaysia Prison Department<br>- Full-time basis<br>- Remuneration less than or equal to RM4,000<br>- Not eligible for: employer who is an employee as well, and employer’s relatives
Ex-Drug	– Under Drug Dependents (Treatment & Rehabilitation) Act 1983<br>- Registered with National Anti-Drugs Agency (MyAADK system)<br>- Must obtain written confirmation from AADK<br>- Full-time basis<br>- Remuneration less than or equal to RM4,000<br>- Not eligible for: employer who is an employee as well, and employer’s relatives

11. Qualification for SME Status and Preferential Tax Rate

A company qualifies as a Small and Medium Enterprise (SME) for the assessment year 2020, allowing it to benefit from the preferential tax rate, provided it meets the following criteria:

The gross income from all business sources for the year is less than RM 50 million.
The paid-up capital of the company, concerning ordinary shares, is less than RM 2.5 million at the beginning of the basis period.
None of the related companies possesses a paid-up capital, in respect of ordinary shares, exceeding RM 2.5 million.
The company is not classified as an investment holding company and is not dormant.

12. Employee Well-Being (Flexible Work Arrangement)

In promoting flexible work arrangements, the government has introduced a special deduction for employers incurring expenses on smartphones, tablets, or personal computers provided to employees, effective from the year of assessment 2020.

To facilitate convenient tracking, it is recommended to establish a dedicated ledger account, segregating transactions for each staff member or renaming transactions according to respective personnel.

Note: The eligibility criteria apply exclusively to resident individuals/entities in Malaysia. The incurred expenses are not classified as employer’s fixed assets, as they are provided to employees.

13. Special Deduction on Rental Reduction

Landlords providing a minimum 30% rental reduction to SME tenants may be eligible for special deductions on the rental discount.

14. Special Deduction on Renovation

As part of the Economic Stimulus Package aimed at mitigating the impact of Covid-19, the government implemented a special deduction for renovation expenses from March 1 to December 31, 2021. The total eligible cost for special deduction during this period is RM 300,000.

Non-Compliance Notice

These rules do not apply if a taxpayer makes a separate claim for deduction as allowable expenses or as capital allowance, aiming to prevent any issues related to double claiming.

15. Deductible Expenses Incurred for Staff & Exempted in the Hand of Staff

Certain perquisites are eligible for Company tax deductions and are simultaneously exempted at the employee’s hand, excluding directors with controlling interest/power.

16. Income Tax (Accelerated Capital Allowance) Rules 2021

The standard annual capital allowance rate, typically 10% or 14% based on asset type, has been superseded by the newly gazetted “Accelerated Annual Rate” of 40% by the government. As per these rules, individuals incurring qualifying plant expenditure (“QPE”) on machinery and equipment, including information and communication technology equipment (“ICT Equipment”), for business purposes between March 1, 2020, and December 31, 2021, are eligible for Accelerated Capital Allowance (“ACA”):

Initial allowance: 20% of the QPE incurred
Annual allowance: 40% of the QPE incurred

The Rules specify that QPE encompasses capital expenditure under paragraph 2 of Schedule 3 to the Income Tax Act 1965 (“ITA”) for machinery and equipment, excluding motor vehicles. ICT Equipment, under these Rules, covers various items such as computers, printers, scanners, and communication networks.

Individuals who have previously claimed ACA for the same QPE, whether under the Income Tax (Accelerated Capital Allowance) (Automation Equipment) Rules 2017 or an exemption under the Income Tax (Exemption) (No. 8) Order 2017, are ineligible for ACA under the current Rules. Additionally, the Rules address hire purchase agreements, deeming that individuals incurring QPE under such agreements for business-related machinery and ICT Equipment will be considered owners, with the QPE treated as the capital portion of the instalment payments.

For detailed information, refer to this link.

17. PROTÉGÉ

Deductions for training costs under the PROTÉGÉ-Ready to Work Programmed Rules 2021 are available for eligible expenses incurred retrospectively from 11 September 2019. Specific rules apply for deduction claims related to training costs under this program.

Conclusion

As we conclude our exploration of the latest 17 tax components influencing businesses in Malaysia, it is evident that staying informed about these intricacies is paramount for effective financial management. Navigating the realm of tax deductions can be complex, but armed with this knowledge, businesses can make informed decisions to minimize tax liabilities and capitalize on available incentives. Whether it’s understanding the nuances of repair and maintenance deductions or embracing special allowances for flexible work arrangements, businesses have the tools to optimize their financial strategies. Remember, staying abreast of these tax components ensures that businesses not only comply with regulations but also leverage opportunities to enhance their financial health in an ever-evolving economic landscape.