Are Car Loan Interest Tax Deductible?

The deductibility of car loan interest is a common question for many taxpayers. For most individuals, interest paid on a car loan for a personal vehicle is not considered a tax-deductible expense. This is because the Internal Revenue Service (IRS) generally classifies such interest as a personal expense, which is not eligible for deduction.

Personal Use Vehicles

Interest paid on car loans for vehicles used primarily for personal transportation is not tax deductible. The Internal Revenue Service (IRS) classifies this as personal interest, which cannot be deducted. This rule applies even if the vehicle is essential for daily activities like commuting to work, running household errands, or transporting family members.

This non-deductibility for personal vehicle interest contrasts with other types of deductible interest, such as qualified mortgage interest or student loan interest. Unlike home mortgage interest, which is often deductible because it is secured by a primary residence, car loans do not qualify for similar tax treatment. Student loan interest can also be deductible up to a certain limit if specific income and other requirements are met.

A temporary exception is effective for tax years 2025 through 2028. This provision allows individuals to deduct up to $10,000 annually in interest paid on a loan used to purchase a qualified new vehicle for personal use. To qualify, the vehicle must be new, its original use must start with the taxpayer, and its final assembly must occur in the United States. The deduction also phases out for higher-income taxpayers.

Business Use Vehicles

Car loan interest can be tax deductible when the vehicle is used for business purposes. This applies to individuals who are self-employed or operate a business. The interest must be an ordinary and necessary expense directly related to conducting a trade or business.

For self-employed individuals or those with a business, the vehicle’s business use can include activities such as client visits, transporting goods or equipment, or travel directly related to managing a rental property business or a farm business. If a vehicle is used for both business and personal reasons, only the portion of the interest corresponding to its business use is deductible. This percentage is typically determined by comparing business mileage to total mileage driven during the tax year.

For example, if a vehicle is used 60% for business and 40% for personal travel, only 60% of the car loan interest paid can be deducted. This deduction is generally claimed on Schedule C (Form 1040), “Profit or Loss From Business,” for sole proprietors. Business owners can choose to deduct actual vehicle expenses, which include car loan interest, or use the standard mileage rate. If the actual expense method is chosen, other related costs like fuel, maintenance, and insurance are also considered.

A limited scenario where car loan interest might be deductible is for certain investment activities, but this is highly specific. The vehicle’s use must be directly and primarily for generating taxable investment income, such as traveling to inspect investment properties. This differs from commuting to a financial advisor or general investment research.

Required Documentation

To substantiate a car loan interest deduction for business use, detailed and accurate records are necessary. The IRS requires taxpayers to maintain specific documentation to support their claims. Without proper records, the deduction may be disallowed during an audit.

Key documentation includes loan statements or year-end summaries from the lender, which provide proof of the interest paid on the car loan. Taxpayers should obtain official statements from their auto loan servicer showing the annual interest paid. Maintaining a comprehensive mileage log is also important. This log should record the date, destination, purpose of each trip, and the odometer readings at the start and end of each business journey. Tax professionals recommend keeping these records contemporaneously, meaning at or near the time of the trip.

Beyond loan interest and mileage, taxpayers should retain records for other vehicle expenses if they are using the actual expense method. These can include receipts for fuel, oil changes, maintenance, repairs, tires, insurance, and registration fees. These records collectively demonstrate the percentage of business use and the total costs incurred. Self-employed individuals typically use Schedule C (Form 1040) to itemize car and truck expenses. The mileage log helps determine the business-use percentage applied to both the loan interest and other actual vehicle expenses reported on this form.