Can You Deduct Interest on a Car Loan?

Car loan interest is a common expense, but its deductibility on tax returns is often misunderstood. For most people, interest paid on a car loan for a personal vehicle is not deductible. The Internal Revenue Service (IRS) generally categorizes such interest as personal interest, which is not allowed as a tax deduction.

However, there are specific circumstances under U.S. tax law where car loan interest can be deducted. These situations typically involve the vehicle’s use for income-generating activities rather than solely for personal convenience. The ability to deduct car loan interest depends on how the vehicle is primarily utilized and the method chosen for claiming vehicle-related expenses.

Distinguishing Personal from Deductible Use

Car loan interest for vehicles used for personal purposes, such as commuting to work, running errands, or family travel, is generally not deductible. The IRS distinguishes between expenses for personal benefit and those directly related to generating income or operating a business.

Deductibility primarily depends on the vehicle’s use in a trade or business, or for certain investment activities. If a vehicle functions as a tool for earning income, a portion of its costs, including loan interest, may be eligible for a tax deduction.

Vehicles used in qualified business activities, self-employment, or specific farming and fishing operations can qualify for interest deductions. The expense must be ordinary and necessary for the income-generating activity. This establishes a direct link between the vehicle’s use and the income it helps produce.

Specific Scenarios for Deductible Interest

Car loan interest can be deductible when the vehicle is used for business or other income-generating activities. This applies to self-employed individuals, independent contractors, or those operating a qualified trade or business. Employees generally cannot deduct car loan interest, even if they use their personal vehicle for work, as most unreimbursed employee expenses are currently suspended.

For business use, the deduction is proportional to the percentage of time the vehicle is used for business purposes. For example, if a vehicle is used 60% for business, only 60% of the car loan interest paid can be considered for deduction. This requires tracking business versus personal mileage.

Taxpayers have two methods for deducting vehicle expenses: the standard mileage rate or the actual expense method. If the standard mileage rate is chosen, car loan interest is not separately deductible because it is already factored into the per-mile rate. The standard mileage rate for 2025 is 70 cents per business mile.

If the actual expense method is used, car loan interest becomes a deductible expense along with other costs such as gasoline, oil, repairs, insurance, registration fees, and depreciation. This method often provides a larger deduction for vehicles with significant operating costs or higher loan interest. Choosing this method in the first year a vehicle is placed in service for business locks a taxpayer into using it for that vehicle in subsequent years. However, starting with the standard mileage rate allows for switching in later years.

Vehicles used directly for investment activities, such as traveling to inspect rental properties, might also have a portion of their loan interest deductible. However, for individual investors, most miscellaneous itemized deductions, including investment expenses, were suspended from 2018 through 2025. This means most individual investors cannot currently deduct these costs on Schedule A. For farming or fishing businesses, car loan interest can be deducted as a business expense on Schedule F.

A new temporary deduction for personal use car loan interest has been introduced by the “One Big Beautiful Bill,” effective for 2025 through 2028. This allows individuals to deduct up to $10,000 annually in interest paid on loans for qualified new personal vehicles. The loan must originate after December 31, 2024, and the vehicle must undergo final assembly in the United States. This deduction phases out for taxpayers with modified adjusted gross income over $100,000 for individuals or $200,000 for joint filers, and does not require itemizing deductions.

Essential Documentation for Deductions

Meticulous record-keeping is essential to substantiate any claim for car loan interest deduction, especially for business or income-generating use. The IRS requires detailed records to support vehicle expense deductions. These records should be maintained for at least three years from the date the return was filed. If depreciation is claimed over several years, records must be kept for at least three years after the final depreciation deduction.

A comprehensive mileage log is a foundational document. This log must clearly distinguish between business and personal miles, recording the date of each trip, the destination, the business purpose, and the total miles driven.

For taxpayers using the actual expense method, detailed records of all vehicle-related costs are necessary. This includes loan statements showing the interest paid during the tax year. Other essential documents include receipts for fuel, oil changes, maintenance, repairs, tires, insurance premiums, and vehicle registration fees.

Proof of the income-generating activity or business use is also crucial. This could involve calendars, client invoices, or other business records that corroborate the vehicle’s role in earning income. Mileage logs and expense receipts provide a clear audit trail and demonstrate compliance with IRS requirements.

Reporting Deductible Interest on Your Tax Return

Properly reporting the deduction on the tax return is the next step once eligibility is determined and all necessary documentation is gathered. The specific form used depends on the nature of the income-generating activity. Self-employed individuals, including independent contractors and gig economy workers, typically report vehicle expenses, including eligible car loan interest, on Schedule C (Form 1040).

For farmers, vehicle expenses are reported on Schedule F (Form 1040). On these forms, car loan interest is included as part of the total actual vehicle expenses. These expenses are then multiplied by the business use percentage to arrive at the deductible amount.

If the standard mileage rate is chosen for deducting vehicle expenses, car loan interest cannot be separately deducted. This simplified method encompasses all operating costs, including a component for interest and depreciation. Taxpayers must choose between the standard mileage rate and the actual expense method for each vehicle.

Accuracy in reporting is important, as insufficient records or incorrect calculations can lead to IRS inquiries or audits. Taxpayers should ensure the vehicle identification number (VIN) is reported on their tax return for any year the personal use car loan interest deduction is claimed. Consulting with a qualified tax professional can provide guidance and help ensure proper reporting.