Can I Deduct Car Loan Interest on Taxes?

General Rules for Personal Car Loan Interest

Interest paid on a car loan for a vehicle used solely for personal purposes is generally not tax-deductible. The Internal Revenue Service (IRS) classifies such interest as a personal expense, which typically does not qualify for a tax write-off. This differs from other types of interest, such as qualified home mortgage or student loan interest, which may offer tax benefits under specific conditions.

Prior to 2025, personal car loan interest was explicitly non-deductible for most taxpayers. This rule considered the cost of commuting to work or using a vehicle for personal errands as a non-reimbursable personal expense.

However, a temporary change has been introduced by the “One Big Beautiful Bill Act,” effective for tax years 2025 through 2028. This new provision allows individuals to deduct interest paid on a loan used to purchase a qualified vehicle for personal use.

The maximum annual deduction is $10,000, and it phases out for taxpayers with modified adjusted gross incomes over $100,000 for single filers or $200,000 for joint filers. To qualify, the loan must originate after December 31, 2024, be used for a new vehicle whose original use starts with the taxpayer, and be secured by a lien on the vehicle. The vehicle itself must be a car, minivan, van, SUV, pickup truck, or motorcycle weighing less than 14,000 pounds, and have undergone final assembly in the United States.

Deductible Business Use of a Vehicle

While personal car loan interest is generally not deductible, interest on a car loan can be deductible if the vehicle is used for business purposes. This primarily applies to self-employed individuals, independent contractors, and certain business owners. For these taxpayers, vehicle expenses, including loan interest, are considered ordinary and necessary costs of conducting their trade or business.

Employees typically cannot deduct vehicle expenses, including interest, even if they use their personal car for work. This is due to changes enacted by the Tax Cuts and Jobs Act (TCJA) of 2017, which suspended miscellaneous itemized deductions through 2025.

Business use of a vehicle involves travel for purposes such as visiting clients, transporting tools or equipment, making deliveries, or traveling between different business locations. These activities are distinct from personal commuting or errands. For instance, driving from a home office to a client’s site is generally considered business travel, while driving from home to a company office is usually not.

A common misconception involves using a home equity loan to purchase a vehicle and attempting to deduct the interest. Interest on a home equity loan is only deductible if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. If the proceeds are used for other purposes, such as buying a car, the interest is not tax-deductible, regardless of the vehicle’s use.

If a vehicle is used for both business and personal driving, only the portion of the interest corresponding to the business use is deductible. This requires careful tracking of mileage to determine the business-use percentage.

Calculating and Claiming the Deduction

For eligible self-employed individuals or business owners, calculating the deductible car loan interest involves determining the vehicle’s business-use percentage. This percentage is found by dividing the total business miles driven by the total miles driven for the year. Accurate mileage logs are crucial for this calculation, as they provide substantiation for the deduction.

Once the business-use percentage is established, the deductible interest is calculated by multiplying the total car loan interest paid during the year by this percentage. For example, if $1,000 in interest was paid and the vehicle was used 60% for business, $600 would be deductible. Taxpayers can obtain a statement of interest paid from their lender, though Form 1098-E is generally for student loan interest, not car loans.

The deduction for business vehicle expenses, including car loan interest, is typically reported on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). Businesses structured as partnerships or corporations would report these expenses on their respective tax forms, such as Form 1065 or Form 1120.

Meticulous record-keeping is paramount for substantiating car expense deductions in case of an IRS audit. Records should include detailed mileage logs noting the date, destination, business purpose, and miles driven for each trip. Additionally, receipts for all vehicle-related expenses like fuel, maintenance, and insurance should be kept.