Can You Write Off Car Loan Interest?

As a general rule, the interest you pay on a car loan for personal use is not tax-deductible. This principle aligns with the broader tax framework that disallows deductions for personal expenses, including those related to transportation for everyday commuting or errands. However, certain specific situations allow for the deductibility of car loan interest, primarily when the vehicle is used for business purposes. Understanding these distinctions is important for accurately assessing potential tax benefits.

General Rules for Car Loan Interest

Interest paid on loans for personal vehicles, such as those used for commuting or family errands, does not qualify for a tax deduction. The Internal Revenue Service (IRS) categorizes these expenses as personal, and personal expenses are not deductible.

This contrasts with other types of interest that qualify for tax deductions. For instance, interest paid on a qualified home mortgage, student loans, and certain investment-related loans can reduce taxable income. The distinction lies in the loan’s purpose and the asset it finances; if the primary use is personal, the associated interest is not deductible. If an expense is not directly related to earning income, it is not eligible for a tax write-off.

Deducting Interest for Business Vehicles

Car loan interest becomes deductible when the vehicle is used for business purposes. This applies to self-employed individuals, independent contractors, or business owners who use their vehicle to conduct business activities. An employee cannot deduct car loan interest, even if they use their personal car for work, unless they are self-employed.

“Business use” means the vehicle is directly involved in generating income for a trade or business. Examples include a delivery driver, a real estate agent traveling to show properties, or a contractor commuting between job sites. If a vehicle is used for both business and personal purposes, only the portion of the interest corresponding to the business use is deductible.

To determine the deductible portion, you must calculate the percentage of business use. This is done by tracking the miles driven for business versus total miles driven during the year. For example, if you drive 10,000 total miles in a year and 4,000 of those miles are for business, your business use percentage is 40%. This percentage is then applied to the total car loan interest paid during the year. If you paid $1,000 in interest and your business use was 40%, you could deduct $400.

You can choose between two methods for deducting vehicle expenses: the standard mileage rate or the actual expense method. If you opt for the actual expense method, which includes car loan interest, you would also account for other costs like fuel, oil, repairs, insurance, and depreciation. However, if you choose the standard mileage rate, interest is not separately deductible as it is factored into the rate.

The choice between these methods depends on which provides a larger deduction and your willingness to maintain detailed records. If you choose the actual expense method in the first year a vehicle is placed in service, you cannot switch to the standard mileage rate for that vehicle in later years. Conversely, if you start with the standard mileage rate, you can switch to the actual expense method in subsequent years, provided you haven’t fully depreciated the vehicle.

Specific Situations for Deductibility

Beyond primary business use, other scenarios allow for car loan interest deductibility, though these are exceptions. For instance, if a vehicle is used for investment activities, a portion of the interest might be deductible as investment interest. This deduction is limited to your net investment income.

If a car loan is refinanced or replaced with a home equity loan or line of credit (HELOC), the interest rules change. While original car loan interest is not deductible for personal use, interest on a HELOC used to purchase a vehicle is not deductible unless the funds were used to buy, build, or substantially improve the home securing the loan. Therefore, using a HELOC to pay off a car loan would not make the interest deductible; it would fall under home equity interest rules, which restrict deductibility to home-related improvements.

A new, temporary provision for 2025 through 2028 allows individuals to deduct up to $10,000 in interest paid on a loan for a new car purchased for personal use. This deduction applies to new vehicles acquired with a loan after December 31, 2024, that meet specific criteria. This tax break has income limitations, phasing out for single filers with a modified adjusted gross income over $100,000 and for married couples filing jointly over $200,000.

Preparing to Claim Your Deduction

Accurately claiming a car loan interest deduction requires accurate record-keeping to substantiate your expenses. The IRS mandates that taxpayers maintain accurate records to prove the amount and purpose of their deductions. This documentation is important in case of an audit or inquiry.

One important record for business use is a mileage log. This log should detail the date of each business trip, the destination, the purpose of the travel, and the starting and ending odometer readings. A maintained mileage log allows you to accurately calculate the business-use percentage of your vehicle for the tax year.

You will also need statements from your lender showing the total interest paid on your car loan during the tax year. If you are also claiming other actual vehicle expenses, such as fuel, maintenance, insurance premiums, and registration fees, you must keep receipts and records for all these expenditures.

Reporting Your Deduction

Once you have gathered all necessary information and calculated your deductible car loan interest, the next step involves reporting it on your tax return. For self-employed individuals and business owners, car expenses, including deductible interest, are reported on Schedule C.

On Schedule C, you will enter the business portion of your car expenses, including the calculated deductible interest, as part of your overall vehicle expenses. If you are using the actual expense method, the interest is included with other vehicle operating costs. However, if you choose the standard mileage rate, you do not separately deduct interest, as it is already built into the per-mile rate, though parking fees and tolls for business purposes can be deducted in addition to the standard mileage rate.