Can I Write Off Car Loan Interest on My Taxes?

It is a common question whether the interest paid on a car loan can be deducted on your taxes. The ability to deduct car loan interest depends heavily on how the vehicle is used, specifically whether it serves a personal or business purpose. Tax laws differentiate between these uses, meaning what applies to one may not apply to the other. Understanding these distinctions is important for accurately determining any potential tax benefits related to your vehicle financing.

Personal Use Car Loan Interest

Interest paid on a car loan for a vehicle used solely for personal reasons is not tax-deductible. Personal car loan interest is considered a non-deductible personal expense by the IRS.

However, a temporary change for tax years 2025 through 2028 allows individuals to deduct interest paid on a loan used to purchase a qualified personal-use vehicle. This deduction is capped at $10,000 annually and begins to phase out for taxpayers with a modified adjusted gross income over $100,000 for single filers or $200,000 for joint filers. To qualify, the loan must have originated after December 31, 2024, and be used to purchase a new vehicle.

Business Use Car Loan Interest

For business use, car loan interest deductions are often available. Small business owners, including self-employed individuals and independent contractors, can deduct the business portion of car loan interest as a business expense.

Vehicle use that qualifies as a business expense includes travel to client sites, transporting goods, or running business-related errands. Daily commuting between your home and your regular workplace is not considered deductible business mileage. If used solely for business, 100% of the interest is deductible. If used for both business and personal needs, only the business-use percentage is deductible.

For example, if a vehicle is used 75% for business, 75% of the car loan interest is deductible. This allocation is based on the proportion of business miles driven compared to total miles driven for the year. The deduction for car loan interest is claimed as part of overall vehicle expenses, not as a separate itemized deduction.

Businesses can choose between two methods for deducting vehicle expenses: the standard mileage rate or the actual expense method. If you choose the actual expense method, you can deduct the business portion of costs like gas, oil, repairs, insurance, registration fees, and car loan interest. Even if you use the standard mileage rate, self-employed individuals can still deduct the business part of car loan interest, state and local personal property taxes on the car, parking fees, and tolls.

Required Information and Documentation

Before claiming any car loan interest deduction, maintaining detailed documentation is essential. Accurate records are necessary to substantiate your claims in case of an IRS audit.

You will need the total car loan interest paid for the tax year, typically provided on an annual interest statement from your lender. You should also have detailed vehicle purchase information, including the cost and date the vehicle was placed in service for business use.

You must maintain comprehensive mileage logs to differentiate between business and personal use. These logs should include the date of each trip, starting and ending locations, the purpose of the trip, and the odometer readings at the start and end of each business journey. An odometer reading at the beginning and end of the year is also required to calculate total annual mileage. This record-keeping is important for calculating the business use percentage of the vehicle, which determines the deductible interest amount.

Retain all supporting documents, such as loan statements, mileage logs, and receipts for other car-related expenses like fuel, maintenance, and insurance. The IRS requires contemporaneous record-keeping for mileage, meaning entries should be made at or near the time of the trip. These records should be kept for at least three years from the date you file your tax return, though some tax professionals recommend retaining them for up to seven years.

Claiming the Deduction

After compiling all necessary information and documentation, the next step involves reporting the deductible car loan interest on your tax return. The method for reporting depends on your business structure. For self-employed individuals, the deduction is reported on Schedule C (Form 1040), “Profit or Loss From Business (Sole Proprietorship).”

On Schedule C, car and truck expenses, including the business portion of car loan interest, are entered on line 9. If you are using the actual expense method, the business part of your car loan interest can also be entered on the “Other Interest” line within the expenses section of Schedule C. When using tax software, you navigate to the car and truck expenses section and enter your vehicle details and mileage information, which helps the software calculate the business use percentage.

For other business structures, such as partnerships or S corporations, the deduction is reported on the relevant business tax forms, which then flows through to the owners’ personal tax returns. While you report the calculated deductible amount on your tax return, you are not required to submit supporting documents, such as mileage logs or loan statements, with the return. However, these documents must be readily available if the IRS requests them during an audit.