(TAX UPDATE) Can You Claim a Tax Deduction on Your Business Renovation? Here's What You Need to Know

Introduction

You just spent RM200,000 renovating your office. New partitions, fresh flooring, a proper pantry, and a meeting room that no longer looks like a storeroom.

Your contractor hands you the invoice. You pass it to your accountant.

And then comes the question: "Can I deduct this against my business income?"

The answer is: it depends. And that "it depends" has changed quite significantly over the last few years.

The Short Story First

Under the general tax rules in Malaysia, renovation and refurbishment costs on business premises are not automatically tax-deductible under Section 33(1) of the Income Tax Act 1967.

This surprises a lot of SME owners.

You spent real money improving a premises you use for business. Why can't you deduct it?

The reason is that renovation costs are typically treated as capital expenditure. You are improving an asset, not spending money to earn revenue. Capital expenditure follows different rules from day-to-day operating expenses.

The Special Deduction That Existed (And Has Expired)

During the COVID-19 period, the government introduced a special measure under the Income Tax (Costs of Renovation and Refurbishment of Business Premise) Rules 2020 [P.U.(A) 381/2020].

This allowed businesses to claim a tax deduction of up to RM300,000 on qualifying renovation and refurbishment costs.

It was extended twice and eventually covered expenses incurred from 1 March 2020 to 31 December 2022.

If you renovated between those dates, and your auditor certified the costs, you could claim the deduction subject to the RM300,000 cap across the entire period.

That window is now closed for general businesses.

So What Are Your Options Today?

Just because the special deduction has expired does not mean your renovation spending disappears into a tax black hole. There are three legitimate routes worth understanding.

Route 1 : Capital Allowance on Plant and Machinery

Not everything in a renovation is a permanent fixture of the building. Some items are movable or qualify as plant and machinery under Schedule 3 of the Income Tax Act 1967.

Examples include:

Air-conditioning units
Electrical fittings and wiring systems that part of plant and machinery that cannot be separated
Signboards
Office furniture (if treated as equipment)
Built-in storage units (in some cases)

If the item qualifies as plant or machinery, you can claim capital allowance. Typically at an initial allowance of 20% and annual allowance of 14% per year. The full cost is recovered over several years, but it is still a deduction.

The line between "building fixture" and "plant and machinery" is not always obvious. This is where proper classification matters.

Route 2 : Revenue Expenditure Treatment

Not every payment to a contractor is capital in nature. Some renovation work is closer to repairs and maintenance than it is to a structural improvement.

If you are restoring existing assets to their original condition rather than upgrading them, the expenses may qualify as revenue expenditure ie fully deductible in the year incurred under Section 33(1).

For example, repainting walls, fixing a leaking roof, or replacing broken tiles in an existing tenanted shophouse are more likely to be revenue in nature.

However, if you are knocking down walls, building new rooms, or adding an entirely new floor, that is capital expenditure.

The question to ask: are you improving the premises, or are you restoring it?

Route 3 : Tourism Operators (A New Special Deduction)

Budget 2026 introduced a specific measure for tourism project operators registered with the Ministry of Tourism, Arts and Culture (MOTAC).

Such operators can claim a deduction of up to RM500,000 on qualifying renovation and refurbishment costs incurred from 11 October 2025 to 31 December 2027.

If your business is in hospitality, accommodation, or tourism services and you are MOTAC-registered, this is worth reviewing with your tax adviser.

What Documentation Should You Keep?

Regardless of which route applies to you, proper documentation protects your deduction claim.

You will need:

Full invoices and receipts from contractors
Breakdown of works done (itemised, not lump sum)
Photos or site records if available
Written confirmation of what the expense was for
For capital allowance claims, a clear classification of each asset

LHDN can and does query renovation claims during tax audits. A lump-sum invoice from a contractor with the description "renovation works" is not enough on its own.

A Common Mistake SME Owners Make

Many business owners see a large renovation spend and assume they can deduct the full amount immediately.

They tell their accountant: "Put it all in the P&L."

The accountant obliges. The tax return goes in. The deduction is claimed.

Two years later, LHDN raises a query. The renovation was capital in nature. The deduction is disallowed. Additional tax, penalties, and interest follow.

The lesson is not to avoid renovating your premises. The lesson is to classify the expenditure correctly from the beginning.

KTP's View

Renovation is a real business cost. You are investing in a workplace that supports your operations.

The tax treatment, however, does not always match the economic reality. Capital expenditure is recovered slowly through capital allowance. Revenue expenditure is deducted in the year. The special deduction window that made things simpler from 2020 to 2022 no longer exists for most businesses.

What this means practically:

Get the breakdown from your contractor before you pay. Do not accept a single-line invoice for RM200,000. Separate the items that qualify as plant and machinery from those that are purely structural. Identify what is repair versus improvement.

Done properly, you will recover more of the tax benefit, and you will be able to defend your position if LHDN comes knocking.

This article is intended for general informational purposes. Tax treatment depends on specific facts and circumstances. Please consult a qualified tax adviser for advice relevant to your situation.

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