Are Car Loans Tax Deductible?

The Internal Revenue Service (IRS) classifies typical commuting and personal errands as non-deductible personal expenses. However, specific circumstances and recent legislative changes introduce exceptions, allowing certain taxpayers to deduct a portion or all of their car loan interest. These exceptions primarily depend on how the vehicle is used and the timing of its purchase.

Understanding Car Loan Interest Deductibility

Historically, interest paid on a car loan for personal use has not been tax deductible, as it is considered a personal expense. This stands in contrast to other types of interest, such as mortgage interest on a primary residence or interest on student loans, which often provide tax benefits. The fundamental principle is that the expense must be ordinary and necessary for generating income to be deductible.

Car loan interest may be deductible if the vehicle is used for business purposes. For self-employed individuals or business owners, the interest can be a legitimate business expense. The deductibility in these cases is directly tied to the percentage of the vehicle’s use for business activities. If a car is used for both business and personal reasons, only the portion of the interest corresponding to the business use is deductible.

Specific Scenarios for Deductibility

Deductibility of car loan interest extends to situations where the vehicle serves specific qualifying purposes. Each scenario has distinct criteria that must be met for the interest to be considered a deductible expense.

Business Use

For business use, self-employed individuals and small business owners may deduct car loan interest. This includes those operating as independent contractors, freelancers, or ride-share drivers. The vehicle must be considered “ordinary and necessary” for the business, meaning it is common and helpful for the business activity. Only the percentage of the vehicle’s use directly attributable to business operations is deductible. For instance, if a vehicle is used 60% for business and 40% for personal travel, only 60% of the interest paid can be deducted.

Temporary Personal Use (OBBBA)

A significant temporary change allows for the deduction of personal car loan interest under the One Big Beautiful Bill Act (OBBBA). This deduction is available for new vehicles purchased between January 1, 2025, and December 31, 2028, with a loan incurred during this period. The maximum annual deduction is $10,000, and the vehicle must be assembled in the United States. This deduction is subject to income limitations, phasing out for single filers with a modified adjusted gross income (MAGI) over $100,000 and for married couples filing jointly with a MAGI over $200,000.

Medical Transportation

In limited circumstances, car expenses related to medical transportation can be deducted as an itemized medical expense. While direct car loan interest is not typically separated and deducted, the costs of using a car for medical reasons, such as gas, oil, and parking fees, can be included. This deduction is part of the overall medical expense deduction, which is subject to a 7.5% Adjusted Gross Income (AGI) threshold. Only the amount of qualified medical expenses exceeding 7.5% of your AGI can be deducted.

Charitable Activities

Regarding charitable activities, taxpayers can deduct mileage for a vehicle used for volunteer work, but generally, car loan interest is not directly deductible. The IRS allows a set mileage rate for charitable use, which covers the operating costs of the vehicle.

Record Keeping and Tax Reporting

Maintaining meticulous records is essential for substantiating any car loan interest deductions claimed. The IRS requires detailed documentation to support the business use of a vehicle or other qualifying activities. This includes maintaining a mileage log that records the date, destination, business purpose, and start and end odometer readings for each trip. Receipts for car loan interest payments, vehicle maintenance, and other related expenses should also be kept.

When deducting vehicle expenses, taxpayers generally have two methods: the actual expenses method or the standard mileage rate method. Under the actual expenses method, you can deduct the business portion of actual costs, including car loan interest, gas, oil, repairs, insurance, and depreciation. If using this method, the deductible interest is calculated by multiplying the total interest paid by the percentage of business use.

Alternatively, the standard mileage rate method offers a simpler approach, allowing a fixed amount per business mile driven. For tax year 2025, the standard mileage rate for business use is 70 cents per mile. If the standard mileage rate is chosen, car loan interest and other actual operating expenses cannot be separately deducted, as these costs are already factored into the rate. It is important to note that if you choose the standard mileage rate in the first year a car is used for business, you generally have the option to switch to the actual expense method in later years.

Deductible business car expenses, including car loan interest under the actual expense method, are typically reported on Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship). For the temporary personal car loan interest deduction under the OBBBA, taxpayers will receive a Form 1098 from their lender showing interest paid, and the vehicle’s VIN must be included on the tax return. Given the complexities of tax law, particularly with new provisions and varying deduction methods, consulting a tax professional is often recommended to ensure compliance and maximize eligible deductions.