In Malaysian tax computation, certain expenses recorded in the financial statements are not deductible for tax purposes. These are known as "add-backs" — they are added back to accounting profit to arrive at adjusted income. Understanding add-backs is essential for accurate tax computation.
| Expense | Add-Back Rate | ITA Section | Notes |
|---|---|---|---|
| Entertainment | 50% | s.39(1)(l) | 50% of entertainment expenses are non-deductible. Includes client entertainment, business meals, gifts. |
| Depreciation | 100% | s.33(1) | Accounting depreciation is fully added back. Replaced by capital allowance (Schedule 3). |
| Penalties & Fines | 100% | s.39(1)(b) | All penalties, compounds, summons are non-deductible. |
| Non-Approved Donations | 100% | s.44(6) | Only donations to government-approved institutions are deductible. |
| Private/Personal Expenses | 100% | s.39(1)(a) | Director personal car, family travel, private use of company assets. |
| Club Membership | 100% | s.39(1)(l) | Recreation and sporting club fees are non-deductible. |
| General Provisions | 100% | s.34 | General bad debt provisions are non-deductible. Only specific bad debts qualify. |
| Political Donations | 100% | Non-deductible | Donations to political parties are never deductible. |
| Capital Expenditure in P&L | 100% | s.33(1) | Renovation, R&D charged to P&L should be capitalised for CA claim. |
Under s.39(1)(l), only 50% of entertainment expenses are deductible. This includes meals with clients, corporate gifts, event hosting, and business promotion involving food and beverages. Staff welfare events (annual dinner, team building) are generally fully deductible if for employees only.
Accounting depreciation is always added back in full. Instead, businesses claim capital allowance under Schedule 3. The rates differ — for example, accounting may depreciate a machine over 10 years (10% p.a.), but tax allows IA 20% + AA 14% = 34% in year one.
Add-backs increase your adjusted income, which increases chargeable income and tax payable. For example, if your accounting profit is RM500,000 and you have RM100,000 in add-backs, your adjusted income becomes RM600,000 — pushing you into the 24% tier.
Payments to non-residents for services rendered in Malaysia may be subject to withholding tax under s.109. If WHT is not deducted, the expense may be disallowed. Common triggers: consultancy fees to foreign companies, royalties, technical fees.
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Try Krofio — RM49/report →Common non-deductible expenses include 50% of entertainment, all depreciation, penalties, non-approved donations, private expenses, club memberships, and general provisions.
Accounting depreciation is replaced by capital allowance under Schedule 3 ITA 1967, which has different rates. Depreciation is fully added back and CA is claimed instead.
Only donations to government-approved institutions under s.44(6) are deductible. Non-approved donations and political donations are fully non-deductible.