Tax Benefits of Equipment Financing: Maximize Your Deductions in 2025
Understand the tax advantages of equipment financing in Malaysia. Learn how to claim capital allowances and reduce your tax burden legally.
The Tax Advantage: Financing Creates Deductions
Every profitable Malaysian business wants to reduce their tax burden legally. Equipment financing offers powerful tax benefits that purchasing outright doesn't provide.
The key difference: when you pay cash for equipment, you get one deduction (the equipment itself). When you finance equipment, you get multiple deductions (equipment depreciation + interest + fees) spread over years.
This doesn't mean financing is "better" than buyingβit means financing provides more opportunities to reduce taxable income over time. For growing businesses, this can significantly reduce cash outflows to LHDN.
The Tax Mechanism: What You Can Deduct
Hire Purchase (Financing) Deductions
1. Capital Allowance (Depreciation):
β’ Year 1: 40% of equipment cost (Initial Allowance)
β’ Year 2 onwards: 20% of equipment cost (Annual Allowance)
β’ Claimed against business income each year
Example: RM200,000 Excavator Financed
β’ Year 1 deduction: RM80,000 (40%)
β’ Year 2 deduction: RM40,000 (20%)
β’ Year 3 deduction: RM40,000 (20%)
β’ Year 4 deduction: RM40,000 (20%)
β’ Year 5 deduction: RM0 (fully depreciated)
Total Deductions: RM200,000 (100% of cost)
2. Interest Payments:
β’ 100% of financing interest is tax-deductible business expense
β’ Each monthly installment includes interest portion
β’ Annual interest deducted from business income
Example (6% Interest, 5-Year Term):
β’ Total interest paid: ~RM60,000
β’ Annual deduction: ~RM12,000
β’ All deductible against business income
3. Related Expenses:
β’ Insurance premiums: 100% deductible
β’ Road tax: 100% deductible
β’ Maintenance and repairs: 100% deductible
β’ Loan fees (processing, documentation): deductible
Cash Purchase Deductions
Capital Allowance Only:
β’ Year 1: 40% deduction
β’ Year 2+: 20% annual deduction
β’ Total: RM200,000 deduction over 5 years (same as financing)
What You Miss:
β’ No interest deduction (you paid no interest)
β’ Upfront deduction vs. spread over time (financing provides consistent annual deductions)
The Tax Timing Advantage: Smoothing Deductions
Scenario: High Profit Year
Business Situation:
β’ Year 1 profit: RM500,000 (high due to large contract)
β’ Year 2 profit: RM300,000 (normal operations)
β’ Need equipment: RM200,000 excavator
Option A: Cash Purchase in Year 1
β’ Year 1 deduction: RM80,000 (40% of RM200k)
β’ Taxable income: RM420,000
β’ Tax at 24%: ~RM100,800
β’ Years 2-5: Additional RM40,000 deductions annually
Option B: Finance (5-Year Term)
β’ Year 1 deduction: RM80,000 (depreciation) + RM12,000 (interest) = RM92,000
β’ Taxable income: RM408,000
β’ Tax at 24%: ~RM97,900
β’ Years 2-5: RM40,000 (depreciation) + RM12,000 (interest) = RM52,000 annually
Result: Financing saves RM2,900 in Year 1 taxes AND provides consistent RM52,000 deductions in Years 2-5 when income may be lower. Cash purchase provides RM40,000 annually.
Capital Allowance Rates (2025)
Current Rates Under Income Tax Act 1967
Initial Allowance (Year 1):
β’ 20% of asset cost for most equipment
β’ 40% for "heavy machinery" (excavators, bulldozers, cranes, prime movers, lorries)
β’ Claim in year of acquisition
Annual Allowance (Years 2+):
β’ 20% of asset cost annually
β’ Claimed each year until fully depreciated
Equipment Categories & Rates
40% Initial Allowance (Heavy Machinery):
β’ Excavators, bulldozers, loaders, graders
β’ Cranes, lorries, trucks, prime movers
β’ Industrial forklifts (3 tons+)
β’ Manufacturing equipment (CNC machines, production lines)
20% Initial Allowance (Light Equipment):
β’ Small forklifts (under 3 tons)
β’ Power tools, hand tools
β’ Office equipment, computers
Special Allowances (Accelerated Depreciation)
Pickup Trucks & Vans (Under 3,500kg):
β’ 40% initial allowance
β’ Special higher rates for certain vehicles (check latest LHDN guidelines)
Automation Equipment:
β’ Industry 4.0 automation may qualify for special incentives
β’ Check MIDA (Malaysian Investment Development Authority) for specific incentives
Real-World Tax Calculation
Scenario: RM300,000 Prime Mover Financed (5 Years, 6% Interest)
Financing Breakdown:
β’ Principal: RM300,000
β’ Interest: RM90,000
Total Payments: RM390,000
Annual Deductions:
| Year | Depreciation | Interest | Total Deduction |
|---|---|---|---|
| 1 | RM120,000 (40%) | RM18,000 | RM138,000 |
| 2 | RM60,000 (20%) | RM18,000 | RM78,000 |
| 3 | RM60,000 (20%) | RM18,000 | RM78,000 |
| 4 | RM60,000 (20%) | RM18,000 | RM78,000 |
| 5 | RM60,000 (20%) | RM18,000 | RM78,000 |
| Total | RM360,000 | RM90,000 | RM450,000 |
Tax Savings Calculation (Assuming RM500,000 Annual Business Income):
β’ Without deductions: Tax on RM500,000 = RM120,000 (24%)
β’ With Year 1 deductions: Tax on RM362,000 = RM86,880 (saves RM33,120)
β’ With Year 2 deductions: Tax on RM422,000 = RM101,280 (saves RM18,720)
Total 5-Year Tax Savings: ~RM100,000+ (depending on your income level)
Hire Purchase vs. Operating Lease: Tax Comparison
Hire Purchase (Ownership)
Deductions:
β Capital allowance (depreciation)
β Interest payments
β Insurance, maintenance, repairs
Ownership:
β Asset on balance sheet
β Builds business net worth
β Residual value after depreciation
Operating Lease (Rental)
Deductions:
β Monthly rental payments (100% deductible)
β No depreciation (you don't own asset)
β No interest deduction (no loan)
Limitations:
β No ownership (asset builds less business value)
β Usage restrictions (often limited hours/year)
β No residual value (return asset at end)
Tax Advantage Comparison:
β’ Hire Purchase: Higher total deductions (capital allowance + interest)
β’ Lease: Consistent deductions but lower total
Winner: Hire purchase offers better tax deductions for profitable businesses
0% Down Payment: Preserving Tax Deduction Capacity
Traditional Financing (20% Down Payment)
RM300,000 Prime Mover:
β’ Down payment: RM60,000
β’ Financed: RM240,000
β’ Capital allowance on: RM240,000 (not RM300,000)
Tax Impact:
β’ Year 1 deduction: RM96,000 (40% of RM240k)
β’ RM24,000 deduction lost (down payment portion)
0% Down Payment Financing
Same RM300,000 Prime Mover:
β’ Down payment: RM0
β’ Financed: RM300,000
β’ Capital allowance on: RM300,000 (full amount)
Tax Impact:
β’ Year 1 deduction: RM120,000 (40% of RM300k)
β’ Maximum deduction preserved
Additional Benefit:
β’ RM60,000 preserved capital earns interest or generates revenue
β’ Can be invested in business operations (generates more deductible expenses)
Special Tax Incentives (2025)
Automation Equipment Allowances (Check Current LHDN Guidelines)
Industry 4.0 Automation:
β’ Additional accelerated allowances may apply
β’ MIDA (Malaysian Investment Development Authority) incentives
β’ Check specific equipment categories for special rates
Green Technology Incentives
Electric Vehicles:
β’ Electric forklifts, electric lorries may qualify
β’ Income tax exemptions or rebates (check current schemes)
β’ Import duty exemptions (for electric vehicles)
Energy Efficient Equipment:
β’ Some energy-efficient equipment qualifies for special allowances
β’ Check current LHDN green technology incentives
Documentation: Proving Your Deductions
Essential Records
Invoices & Receipts:
β’ Equipment purchase invoice
β’ Financing agreement/loan schedule
β’ Interest payment statements (show interest portion)
β’ Insurance payment receipts
β’ Maintenance and repair invoices
Asset Register:
β’ Maintain fixed asset register
β’ Track acquisition date, cost, depreciation schedule
β’ Disposal/sales documentation
LHDN Audit Risks:
β’ Ensure all deductions have supporting documents
>β’ Keep records minimum 7 years (statutory requirement)
β’ Separate business and personal expenses clearly
Common Tax Mistakes to Avoid
Mistake 1: Not Claiming All Deductions
Many businesses claim only equipment cost deduction but forget:
β’ Interest portion of installments (separate principal and interest)
β’ Insurance and road tax (fully deductible)
β’ Maintenance and repairs (even minor repairs add up)
Mistake 2: Mixing Business and Personal Use
Equipment used personally (e.g., director takes lorry home weekends):
β’ Portion of deduction disallowed (personal use ratio)
β’ Complex calculation required
β’ LHDN may audit and disallow portion of deductions
Mistake 3: Not Keeping Proper Records
LHDN requires evidence for every deduction claimed:
β’ Missing invoices = deduction disallowed
β’ Unsegregated expenses (personal + business) = complications
β’ Incomplete asset register = audit risks
Mistake 4: Wrong Depreciation Rates
Using incorrect allowance rates:
β’ Applying 20% to equipment qualifying for 40%
β’ Not claiming special allowances for eligible equipment
β’ Missing accelerated depreciation incentives
Ing Heng Credit: Tax-Smart Financing
1. We Maximize Your Deductions
Our financing structures optimize tax benefits:
β’ 0% down payment = finance full asset amount = maximum capital allowance
β’ Interest schedules clearly separated (easy tax reporting)
β’ Documentation provided for all deductible expenses
2. We Understand Business Cash Flow
Tax deductions help, but cash flow matters:
β’ Structure payments to match your seasonal revenue
β’ Payment holidays during low-revenue months
β’ Flexible terms accommodate contract payment cycles
3. Fast Approval = Tax Year Benefits
Getting financing approved early in tax year:
β’ Deploy equipment and start claiming deductions immediately
β’ Don't lose months of deductions waiting for slow approval
β’ Start generating revenue that finances the tax-deductible payments
4. Consult Tax Advisor
We provide financing statements, but:
β’ Consult your tax accountant for specific advice
β’ Verify current capital allowance rates (they change)
β’ Calculate your specific tax savings based on your business structure
β’ Ensure compliance with latest LHDN guidelines
The Bottom Line: Financing = Tax Efficiency
Equipment financing isn't just about acquiring equipmentβit's about optimizing your tax position. By financing, you:
- Maximize Deductions: Claim capital allowance + interest + related expenses
- Smooth Tax Liability: Consistent annual deductions reduce taxable income predictably
- Preserve Capital: 0% down payment keeps cash for operations while still claiming deductions
- Build Business Value: Ownership adds assets to your balance sheet, increasing net worth
Don't leave tax savings on the table. Structure your equipment financing to maximize legal deductions and reduce your tax burden.
Join 4,000+ businesses who have trusted Ing Heng Credit since 1985.
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