Start-up Costs for a Business: Are They Deductible?

General rule: costs before the business begins are not deductible

Under Malaysian tax law, expenses incurred before the business begins (pre-operational/pre-commencement expenses) are not allowed as deductions against gross business income — because they are not incurred wholly and exclusively in producing income.

This principle is stated in Public Ruling No. 11/2013 (PR 11/2013) §6.1 and Public Ruling No. 2/2002.

Source: HASiL — PR 11/2013 §6.1; PR 2/2002; HASiL FAQ (Companies) Q4 (see Official sources section).

When is a business considered to have "commenced"?

The definition of the date of commencement of a business is important because it determines when s.33(1) starts to apply. According to PR 11/2013 §5.2:

Commencement occurs when activities carried on in the course of the business or that are part of the income-producing process begin.
This is different from preparatory activities.
Indicative examples:
Manufacturing: purchase of raw materials.
Retailing: purchase of goods for resale.
Agriculture: planting the first seeds / purchasing livestock stock.

Source: HASiL — PR 11/2013 §5.2.

Specific exceptions: Schedule 4B and the Minister of Finance Regulations

Although the general rule says pre-operational costs are not deductible, there are specific exceptions under Schedule 4B of the ITA and the Regulations issued by the Minister of Finance [P.U.(A) 61/1992, 111/1995, 160/1996, 475/2003, 472/2005, 135/2006, 65/2007, 361/2008, 401/2009, 76/2012].

Allowed categories (with year of effect):

Category	Year of effect
Pre-operational expenditure for MOF-approved overseas ventures (including feasibility study costs, market research, travel fares; actual accommodation/meals not exceeding RM400/day)	YA 1992
Company incorporation costs	YA 2004
Approved training expenditure (double deduction)	1992
Pre-start-up business training expenditure	1996
REIT/PTF establishment expenditure	2006
Islamic stockbroking company establishment expenditure	2.9.2006
Pre-start-up employee recruitment expenditure (within 1 year before commencement)	2009
Franchise fees paid before commencement	2012

Qualifying pre-operational expenditure not absorbed is carried forward until fully deducted (subject to the "defined aggregate").

Source: HASiL — PR 11/2013 §3.2, §7–14; HASiL FAQ (Companies) Q4/Q5.

Simple examples

Buying raw materials before the factory operates — if this is the commencement of income-producing activity, expenses after the commencement date are subject to the usual s.33(1)/s.39(1) rules.
Feasibility study for an MOF-approved overseas venture — qualifies as pre-operational expenditure under Schedule 4B (since YA 1992).

Remember

Costs before the business begins: not deductible (general rule).
The business commencement date determines when s.33(1) starts to apply.
Specific exceptions exist under Schedule 4B + MOF Regulations (list above).
Qualifying expenditure not absorbed is carried forward.
PR 11/2013 focuses on companies — verify application to individuals/partnerships.

Frequently Asked Questions (FAQ)

Q. I bought a computer before my business began. Can I deduct it? A. Under the general rule, pre-commencement expenses are not deductible except in the specific Schedule 4B/MOF Regulation categories. Verify the category.

Q. I paid franchise fees before starting the business. Qualifying? A. Yes, franchise fees paid before commencement qualify since 2012 (PR 11/2013 §14).

Q. What if qualifying expenses exceed first-year income? A. The balance is carried forward until fully deducted (subject to the defined aggregate).

Q. I am a sole proprietor — do these exceptions apply to me? A. PR 11/2013 is directed at companies; verify application to sole proprietors before deciding. This item still awaits official confirmation from HASiL — check again with HASiL before deciding.

Glossary

Pre-operational — before the business begins.
Date of commencement — the date the income-producing activity begins.
Schedule 4B of the ITA — the exception provision for pre-operational expenditure.
Defined aggregate — the prescribed aggregate limit for carry-forward.
MOF — Ministry of Finance.
YA — Year of Assessment.