What Are Non-Deductible Expenses
When calculating Income Tax, not every company expense reduces gross income. A non-deductible expense is a cost that tax rules do not recognize as a deduction when determining taxable income.
The underlying principle comes from the Income Tax Law: only costs to earn, collect, and maintain income that is a tax object may be deducted (Article 6 of Law No. 36 of 2008). Conversely, spending unrelated to that purpose, or specifically prohibited, falls into the non-deductible category.
This gap between deductible and non-deductible costs is what produces a fiscal correction: the adjustment from commercial accounting profit to taxable income under tax rules.
Legal Basis
The official list of non-deductible expenses sits in Article 9 paragraph (1) of Law No. 36 of 2008 (the Income Tax Law), as last amended by Law No. 7 of 2021 (HPP). This article is the main reference when preparing a fiscal correction.
There is also a new affirmation through Article 20A of Government Regulation No. 20 of 2026, which amends PP No. 55 of 2022. It explicitly states that bribe and gratuity costs cannot be charged as expenses, for officials both at home and abroad.
The two bases work together: Article 9 of the Income Tax Law sets the general list, and Article 20A of PP 20/2026 sharpens one category that was previously only implied.
List of Non-Deductible Expenses
Under Article 9 paragraph (1) of Law No. 36 of 2008, key non-deductible items include:
Profit distributions in any name or form, such as dividends, including dividends paid to insurance policyholders and the distribution of cooperative surplus (Article 9(1)(a)).
Costs charged for the personal benefit of shareholders, partners, or members (Article 9(1)(b)).
The formation or build-up of reserve funds, except certain reserves permitted by law (Article 9(1)(c)).
Health, accident, life, endowment, and scholarship insurance premiums paid by an individual taxpayer, unless paid by the employer and counted as employee income (Article 9(1)(d)).
Reimbursement or compensation in the form of benefits in kind, subject to exceptions under the latest HPP rules and their implementing regulations (Article 9(1)(e)).
Gifted assets, aid, donations, and inheritances, except certain donations regulated specifically (Article 9(1)(g)).
Income Tax itself (Article 9(1)(h)).
Administrative penalties in the form of interest, fines, and surcharges, plus criminal sanctions in taxation (Article 9(1)(k)).
Beyond this list, since PP 20/2026 took effect, bribe and gratuity costs are confirmed as non-deductible (Article 20A of PP No. 20 of 2026).
How Fiscal Correction Works
Commercially, a company records all operating costs in its profit and loss statement. When calculating tax, non-deductible costs must be removed. This is a positive fiscal correction, because it raises taxable income above commercial profit.
The steps are simple: start from accounting profit before tax, then add back each non-deductible expense. The result is taxable income, the basis for the tax payable.
The most common mistake is forgetting to correct non-deductible costs. Taxable income is then understated, and on audit, an underpayment plus penalties may arise.
Worked Example
Suppose PT Sejahtera records commercial profit before tax of IDR 1,000,000,000 in one year. Its operating costs include:
A tax administrative fine of IDR 20,000,000 (non-deductible, Article 9(1)(k)).
Family recreation costs for a shareholder of IDR 30,000,000 (non-deductible, personal benefit, Article 9(1)(b)).
An informal payment to an official qualifying as a gratuity of IDR 50,000,000 (non-deductible, Article 20A of PP 20/2026).
Total positive fiscal correction: IDR 20,000,000 + IDR 30,000,000 + IDR 50,000,000 = IDR 100,000,000.
Taxable income becomes IDR 1,000,000,000 + IDR 100,000,000 = IDR 1,100,000,000. Tax payable is computed on this figure, not on the IDR 1,000,000,000 commercial profit.
How to Record and Report
In practice, non-deductible costs are still booked in the commercial financial statements so accounting records stay accurate. The separation happens on the fiscal correction worksheet when preparing the annual corporate Income Tax return.
Use the Article 9 list as a checklist. Flag each account holding non-deductible costs, total the amounts, then enter them as positive corrections in the fiscal reconciliation. Document the basis for each correction so it is easy to trace during an audit.
Frequently Asked Questions
Are all fines non-deductible?
Fines and administrative penalties in taxation are non-deductible (Article 9(1)(k) of Law No. 36 of 2008). For non-tax fines, treatment depends on their link to earning income, so each must be assessed case by case.
How does a non-deductible expense differ from a fiscal correction?
A non-deductible expense is the type of cost, while a fiscal correction is the adjustment process. A non-deductible expense is one cause of a positive fiscal correction.
Are bribe costs really banned from 2026?
The ban is now explicit through Article 20A of PP No. 20 of 2026. Previously it could only be inferred from the general principles of Articles 6 and 9 of the Income Tax Law.
What is the risk of forgetting to correct non-deductible costs?
Taxable income becomes understated. If found on audit, an underpayment tax assessment plus administrative penalties may be issued under applicable rules.