Top 5 Tax Deduction for Business: A Guide for SMEs

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.

Difference of Allowable and Disallowable Expenses

Under the Malaysian tax law, expenses are classified into two major groups as follows:

1. Allowable Expenses

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.

2. Disallowable Expenses

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.

Top 5 Malaysia SMEs Tax Deductions.

The following are the top five tax-deductible expenses that are mostly claimed in Malaysia. 

1. Employee-Related Expenses

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.

Examples of allowable employee expenses are:

• Salaries, wages, and overtime
• Allowances like meal allowance, transport allowances, and mobile allowances.
• Statutory contributions that are mandatory in nature such as:
  • Employee Provident Fund (EPF)
  • Organisation of Social Security (SOCSO)
  • Employment Insurance System (EIS).
• Business travel and training staff claims.
• Medical benefits and uniforms to the employees.

Key considerations:

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.

2. Rental and Utilities

The cost of maintaining business premises can be deducted as long as it is fully and purely incurred in the running of the business.

Rental and utility charges that can be incurred are:

• Rental of office or business premises.
• Electricity and water bills.
• Subscriptions to the internet and mobile data.
• Telephone lines.

Key considerations:

As hybrid and remote work arrangements are becoming the norm, portion of expenses can be claimed based on business usage

3. Professional Service Fees

The deduction of professional fees is only allowed in cases of direct relationship between the fee and business.

The following are examples of some of the permitted professional fees:

• Legal fees (Reference: PR 06/2006)
• Accounting fees
• Auditing fees
• Company secretarial fees
• Tax agent and tax filing fees

Key considerations:

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.

4. Repair and Maintenance Costs.

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.

Important Difference: Revenue and Capital Expenditure.

To qualify as an allowable deduction, the expense must be revenue in nature, meaning:

• It restores the asset back to its original.
• It does not enhance or upgrade the value of the asset

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.

5. Business Insurance

Expenses related to payment of insurance for business purposes such as property insurance, stock in trade insurance and insurance for employees.

Business insurance that can be made is:

• Property insurance
• Fire and flood insurance
• Stock-in-trade insurance
• Insurance on the employees (e.g. group medical cover)

Non-Allowable Insurance

One of the most commonly misinterpreted rules:

• Personal life insurance for the director is not allowable for tax deduction.

The only insurance that is suitable is insurance that specifically covers the business or employees.

Important Factors in Making Claims as Tax Deductibles.

The key consideration to be taken by the business in determining the deductibility of business expenses in Malaysia are listed below:

1. Expense Should be “wholly and exclusively” incurred to generate revenue for the business

2. Capital Expenditure is not deductible.

Examples include:

• Purchasing a new building
• Upgrading machinery
• Improvement renovations enhancing the value of the assets.

3. Expenses: Under Section 39 of Income tax Act 1967.

Any expenses under Section 39 of Income Tax Act 1967 are not deductible. This is including:

• Fines and penalties
• Private expenses
• some entertainment costs.
• Capital withdrawals

Companies need to get acquainted with these limits to prevent invalidated claims.

The point of knowing what expenses are allowable and non allowable.

The learning of the allowable and non allowable expenses in taxation Malaysia assists businesses:

• Ease taxation burdens.
• Avoid audit risks
• Improve cashflow
• Improve long strategic planning.
• Be in full compliance with tax laws.

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:

LHDN Malaysia

Updated on : 19 November 2025 

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