One of the most common questions business owners ask after receiving their financial statements is:
“Our company made RM100,000 profit. Why isn’t the tax calculated directly on RM100,000?”
The answer is simple: accounting profit and taxable profit are not necessarily the same.
A company’s financial statements are prepared according to applicable accounting standards, while its tax computation follows the requirements of Malaysian tax legislation.
As a result, certain income and expenses recorded in the accounts may be treated differently for tax purposes.
Understanding this difference can help business owners better understand their tax computation and avoid confusion when reviewing their company’s tax position.
What Is Accounting Profit?
Accounting profit is the profit reported in the company’s financial statements.
It is generally calculated by taking the company’s income and deducting the expenses recognised during the financial year.
For example:
Revenue: RM1,000,000
Less: Operating expenses: RM900,000
Accounting profit: RM100,000
This RM100,000 is the profit shown in the company’s Statement of Profit or Loss.
However, this does not automatically mean that RM100,000 is the company’s taxable income.
What Is Taxable Profit?
Taxable profit, or the income on which tax is ultimately determined, is calculated through the company’s tax computation.
The tax computation starts with the accounting results and makes the necessary tax adjustments based on the applicable tax rules.
In simple terms:
Accounting Profit
+/- Tax Adjustments
= Adjusted / Statutory Income for Tax Purposes
The final tax position may therefore be different from the profit reported in the financial statements.
Why Are Tax Adjustments Necessary?
The main reason is that not every accounting treatment is the same as the tax treatment.
An expense may be recognised in the company’s financial statements but may not qualify for a tax deduction.
Similarly, certain items may receive specific tax treatment that differs from their accounting treatment.
This is why a tax computation is required rather than simply applying the corporate tax rate to the accounting profit.
1. Non-Deductible Expenses
One of the most common reasons for a difference between accounting profit and taxable profit is expenses that are not allowable for tax purposes.
For example, a company may record various expenses in its accounts, but not all of them will necessarily qualify for a tax deduction.
Common areas that may require review include:
- Private or non-business expenses
- Certain entertainment expenses
- Penalties and fines
- Certain provisions
- Capital expenditure
- Expenses that are not wholly and exclusively related to the production of income
HASiL’s guidance on allowable and non-allowable expenses highlights that tax deductibility depends on the applicable tax rules and the nature of the expenditure.
Therefore, an expense being recorded in the accounting system does not automatically mean that it is deductible for tax purposes.
2. Depreciation Is Not the Same as Capital Allowance
This is another area that frequently causes confusion.
Companies generally record depreciation in their financial statements when assets are used in the business.
However, depreciation is not simply deducted from accounting profit to determine the company’s tax position.
Instead, qualifying capital expenditure may be eligible for capital allowances, subject to the applicable tax rules.
For example, suppose a company purchases machinery for RM100,000.
The company’s accounts may recognise depreciation over several years.
For tax purposes, however, the company may need to determine whether the expenditure qualifies for capital allowances and calculate the relevant allowances according to the tax rules.
HASiL explains that capital allowances are provided in place of depreciation for qualifying business assets.
This means:
Accounting treatment: Depreciation
Tax treatment: Capital allowance, where applicable
The two should not be treated as interchangeable.
3. Provisions and Accruals May Receive Different Tax Treatment
Companies often recognise provisions and accruals in their financial statements to reflect expenses relating to the accounting period.
However, the tax treatment may depend on the specific nature of the amount.
For example, a provision recognised in the accounts does not automatically mean that a tax deduction is available in the same year.
This is why the tax computation needs to review relevant provisions and accruals rather than simply accepting every accounting expense as tax deductible.
4. Capital Expenditure Is Different From Revenue Expenditure
A company may incur significant expenditure on equipment, renovation, machinery or other assets.
From an accounting perspective, the expenditure may be capitalised and depreciated over its useful life.
For tax purposes, the treatment depends on the nature of the expenditure and the applicable tax provisions.
Where qualifying capital expenditure is incurred, capital allowances may potentially be available.
Therefore, companies should maintain a proper fixed asset register and supporting documents for significant asset purchases.
5. Some Income May Also Receive Special Tax Treatment
The difference is not only about expenses.
Certain types of income may receive specific tax treatment depending on the circumstances and applicable legislation.
For example, companies may need to consider the nature and source of income, exemptions, incentives and other relevant provisions when preparing their tax computation.
Therefore, the tax computation should consider both:
What the company earned
and
How that income is treated for tax purposes.
A Simple Example
Let’s say a company reports:
Item | Amount |
Revenue | RM1,000,000 |
Accounting expenses | (RM900,000) |
Accounting profit | RM100,000 |
During the tax review, the company identifies RM10,000 of expenses that are not deductible for tax purposes.
It also has RM20,000 of capital allowances available.
A simplified illustration could look like this:
Accounting profit: RM100,000
Add back: RM10,000 non-deductible expenses
Less: RM20,000 capital allowances
Taxable income: RM90,000
This is only a simplified illustration. The actual tax computation depends on the company’s specific circumstances and the applicable Malaysian tax rules.
The important point is that the tax computation is not simply the accounting profit multiplied by the tax rate.
Why Supporting Documents Still Matter
A proper tax computation should be supported by appropriate accounting records and documentation.
Companies should maintain documents such as:
- Sales invoices
- Purchase invoices
- Receipts
- Bank statements
- Payroll records
- Rental agreements
- Loan documents
- Fixed asset invoices
- Expense claims
- Supporting documents for tax adjustments
- Capital allowance schedules
Good documentation allows the company and its tax agent to understand why particular adjustments have been made.
It can also help when the company needs to respond to questions from the tax authorities.
What Should Business Owners Review?
When reviewing the company’s tax computation, business owners should not only look at the final tax payable.
Consider asking:
1. Does the accounting profit agree with the audited financial statements?
The starting point of the tax computation should be based on the appropriate final accounting figures.
2. Are the major tax adjustments reasonable?
Large add-backs or deductions should be understood and supported.
3. Have all relevant capital allowances been considered?
Review the fixed asset additions and disposals and determine whether qualifying expenditure exists.
4. Are non-deductible expenses properly identified?
Not every accounting expense automatically qualifies for a tax deduction.
5. Are supporting documents available?
Keep sufficient documentation to support the company’s accounting records and tax position.
Why This Matters During an Audit and Tax Review
The distinction between accounting profit and taxable profit is particularly important when the company’s financial statements and tax computation are being prepared together.
Audit adjustments may change the final accounting profit.
When that happens, the tax computation may also need to be reviewed.
For example, if an audit identifies an additional expense or reverses an incorrectly recorded expense, the tax treatment of that adjustment should also be considered.
This is why it is important for the audit, accounting and tax processes to be properly coordinated.
Common Mistakes Companies Should Avoid
Some common mistakes include:
Mistake 1: Assuming every accounting expense is tax deductible.
Mistake 2: Treating depreciation as a tax deduction instead of considering capital allowances.
Mistake 3: Preparing the tax computation using draft accounts when the final audited figures have changed.
Mistake 4: Failing to maintain supporting documents for significant expenses.
Mistake 5: Not reviewing tax adjustments with the person responsible for the tax computation.
Mistake 6: Assuming a lower accounting profit automatically means a lower taxable profit.
Conclusion
Accounting profit and taxable profit serve different purposes.
Accounting profit shows how the company has performed based on accounting principles.
Taxable profit is determined after applying the relevant tax rules and adjustments.
Therefore, it is completely normal for a company’s taxable profit to be different from the profit shown in its financial statements.
The important thing is to ensure that the differences are properly identified, correctly calculated and adequately supported.
For business owners, understanding this distinction can make tax computations easier to review and help avoid the common misconception that corporate tax is simply calculated on the profit shown in the audited accounts.
Your financial statements tell you how your business performed. Your tax computation determines how that performance is treated for tax purposes.