Is Auto Loan Interest Tax Deductible?
Get clear answers on auto loan interest tax deductibility. Understand the conditions and considerations for potential tax savings.
Auto loan interest deductibility is a topic many individuals explore when managing their finances. Understanding the specific conditions under which this interest can be claimed as a tax deduction is important for taxpayers. The rules vary significantly depending on whether the vehicle is used for personal or business purposes, and recent legislative changes have introduced new considerations for personal vehicle loans.
Personal Use Vehicle Interest
Interest paid on a loan for a personal vehicle has traditionally not been tax deductible for most individuals. The Internal Revenue Service (IRS) generally classifies such interest as a personal expense, similar to interest on credit card debt or other personal loans. This classification has historically prevented deductions for vehicles used solely for personal purposes, like commuting or family errands.
The One Big Beautiful Bill Act (OBBBA) introduced a temporary deduction for personal auto loan interest. This deduction is effective for tax years 2025 through 2028. Individuals may deduct up to $10,000 annually in interest paid on a loan used to purchase a qualified new vehicle for personal use.
To qualify for this new deduction, the vehicle must be a new purchase, with its original use commencing with the taxpayer. It must also have undergone final assembly in the United States, and used vehicles do not qualify. The loan must have originated after December 31, 2024, and be secured by a lien on the vehicle.
The deduction is available to both itemizing and non-itemizing taxpayers. It is subject to income-based phase-outs, beginning for taxpayers with a modified adjusted gross income (MAGI) over $100,000 for single filers and $200,000 for those married filing jointly. The taxpayer must also include the Vehicle Identification Number (VIN) of the qualified vehicle on their tax return for any year the deduction is claimed.
Business Use Vehicle Interest
Auto loan interest can be deductible when the vehicle is used for business purposes, primarily for self-employed individuals, independent contractors, or small business owners. This deduction applies because the interest is considered an an ordinary and necessary business expense. If a vehicle is used entirely for business, 100% of the loan interest can be deducted.
When a vehicle is used for both business and personal reasons, only the portion of interest related to business use is deductible. The deductible amount is determined by the percentage of business use versus total use. For instance, if a vehicle is used 60% for business, then 60% of the car loan interest paid can be deducted.
To calculate this percentage, taxpayers track their business miles and total miles driven during the year. The business use percentage is derived by dividing the business miles by the total miles. This percentage is then applied to the total interest paid on the car loan. For example, if $1,000 in interest was paid and the business use percentage is 75%, a $750 deduction could be claimed.
Taxpayers have two primary methods for deducting vehicle expenses, including the business portion of auto loan interest: the standard mileage rate method or the actual expense method. The actual expense method allows for the deduction of a percentage of all actual vehicle costs, such as gas, oil, repairs, insurance, registration fees, and depreciation, in addition to loan interest. This method often yields a higher deduction if vehicle operating costs are substantial.
The standard mileage rate method, while simpler, includes a set rate per business mile driven that accounts for most vehicle operating costs, including depreciation. Taxpayers using the standard mileage rate can still deduct business-related parking fees and tolls separately. For 2025, the standard business mileage rate is 70 cents per mile.
Choosing between these methods depends on individual circumstances. If the actual expenses, including loan interest, exceed the deduction calculated using the standard mileage rate, the actual expense method may be more beneficial. The IRS provides guidance in Publication 463, “Travel, Gift, and Car Expenses,” which details these methods.
Important Considerations for Claiming Deductions
Claiming auto loan interest deductions, particularly for business use, requires careful attention to tax rules and record-keeping. Business interest deductions are reported on Schedule C (Form 1040), “Profit or Loss From Business,” for sole proprietors and single-member LLCs.
Record-keeping is required by the IRS to substantiate any claimed deductions. Taxpayers must maintain detailed logs of their vehicle use, including the date of each trip, the starting point, destination, and the business purpose. It is also necessary to record annual odometer readings at the beginning and end of the year to accurately determine total mileage.
For those choosing the actual expense method, receipts for all vehicle-related expenses, such as fuel, maintenance, insurance, and repairs, must be kept. These records help in precisely calculating the total costs and the business-use percentage. The IRS mandates that records be kept contemporaneously, meaning at or near the time of the expense or trip. Tax records, including mileage logs and receipts, should be retained for at least three years from the date the tax return was filed.
The Tax Cuts and Jobs Act (TCJA) of 2017 suspended the deduction for unreimbursed employee business expenses from 2018 through 2025. This means that employees who use their personal vehicles for work, even if not reimbursed by their employer, cannot deduct car loan interest or other vehicle-related expenses during this period. This deduction is expected to be reinstated starting in 2026.