Can You Deduct Interest Paid on a Car Loan?

Interest paid on a car loan is generally not tax deductible for personal expenses. However, specific circumstances allow for car loan interest to be deductible, primarily when the vehicle is used for business or investment activities. For a limited period, a new provision also allows for a deduction for certain personal use vehicles.

General Rule for Personal Use

Interest paid on a car loan for a vehicle used solely for personal purposes, such as commuting to work, running household errands, or leisure travel, is generally not tax deductible. This principle aligns with broader tax law, which distinguishes between personal expenditures and those incurred for income-generating activities.

A new temporary provision, the “One Big Beautiful Bill Act,” introduces an exception for tax years 2025 through 2028. This act allows individuals to deduct interest paid on a loan used to purchase a qualified vehicle for personal use. To qualify, the vehicle must be new, have its final assembly in the United States, and the loan must originate after December 31, 2024. The deduction is capped at $10,000 annually and begins to phase out for taxpayers with modified adjusted gross income exceeding $100,000 for single filers or $200,000 for joint filers. The vehicle identification number (VIN) must be reported on the tax return when claiming this deduction.

Situations Where Car Loan Interest May Be Deductible

Beyond the temporary personal-use provision, car loan interest may be deductible if the vehicle is used for business or specific investment activities. The nature of the vehicle’s use directly influences its deductibility.

For individuals who are self-employed, such as sole proprietors, independent contractors, or gig economy workers, interest on a car loan is deductible if the vehicle is used for their business. The portion of the interest corresponding to the vehicle’s business use can be claimed as a business expense. This deduction is typically reported on Schedule C (Form 1040), Profit or Loss From Business.

The rules are different for employees who use their personal car for work. Unreimbursed employee business expenses, including car loan interest, are generally not deductible for federal income tax purposes. Therefore, even if an employee uses their car extensively for work-related tasks, they cannot typically deduct the car loan interest unless they fall into specific, limited categories of statutory employees or certain performing artists.

If a vehicle is used for investment activities, such as traveling to inspect rental properties or manage other investments, a portion of the car loan interest may be deductible. This applies when the vehicle’s use is directly related to generating income from these activities. Similarly, if the vehicle is used primarily for a rental property business, the associated interest can be deducted as a rental expense. This type of deduction would typically be reported on Schedule E (Form 1040), Supplemental Income and Loss.

Calculating Your Deductible Amount

Determining the precise amount of car loan interest that can be deducted involves calculating the vehicle’s business-use percentage. This percentage represents the proportion of miles driven for business or qualifying investment activities compared to the total miles driven during the year. Keeping a detailed mileage log is essential for this calculation, documenting the date, destination, purpose, and odometer readings for each trip.

To calculate the deductible interest, first identify the total interest paid on the car loan for the tax year. Refer to your annual loan statements or contact your lender to obtain a summary of the interest paid.

Once you have the total interest paid and the business-use percentage, multiply these two figures. For instance, if you paid $1,000 in car loan interest and the vehicle was used 60% for business, you could deduct $600. Other car-related expenses, such as fuel, maintenance, insurance, and repairs, can also be deducted based on the same business-use percentage.

Record Keeping and Reporting

Maintaining meticulous records is important for substantiating any car-related deductions, including car loan interest. Comprehensive documentation helps ensure compliance with tax regulations and provides necessary evidence in case of an audit. Essential records include detailed mileage logs that capture the date, destination, purpose of the trip, and odometer readings at the beginning and end of each business journey.

It is also important to retain all car loan statements, particularly those showing the total interest paid during the tax year. Receipts for other vehicle-related expenses, such as fuel, oil changes, repairs, and insurance premiums, should be kept as well. Digital or physical records, including calendar entries or specialized tracking applications, can help organize this information effectively.

For self-employed individuals, the calculated deductible car loan interest, along with other eligible vehicle expenses, is reported on Schedule C (Form 1040), Profit or Loss From Business. If the vehicle is used for rental property activities, the deductible interest and other related expenses are reported on Schedule E (Form 1040), Supplemental Income and Loss.

Employees generally cannot deduct car loan interest or other unreimbursed business expenses for federal income tax purposes, as previously discussed. Therefore, there is no specific form for most employees to report such expenses. While Form 2106, Employee Business Expenses, existed for this purpose, its applicability is now very limited to specific categories of employees.