Is Auto Loan Interest Tax Deductible?

Interest paid on a loan for a vehicle used solely for personal reasons is generally not tax-deductible. The Internal Revenue Service (IRS) categorizes this as personal interest, similar to credit card debt. However, recent legislative changes have introduced a temporary exception allowing for a deduction under specific circumstances.

General Rule for Personal Use

The IRS states that interest on a loan for personal car use, or on credit cards and installment loans for personal expenses, cannot be deducted. This rule applies regardless of how the vehicle is used, as daily commuting, errands, or leisure are all personal uses.

A temporary change introduced by the One Big Beautiful Bill Act (OBBBA) allows for a new deduction for personal car loan interest. For new vehicles purchased between January 1, 2025, and December 31, 2028, eligible taxpayers may deduct up to $10,000 in interest paid on qualifying vehicle loans. To qualify, the vehicle must be new, have undergone final assembly in the United States, and its Vehicle Identification Number (VIN) must be included on the tax return. This deduction phases out for single filers with a modified adjusted gross income (MAGI) over $100,000 and for those married filing jointly with a MAGI over $200,000. Taxpayers will receive a Form 1098 from their lender showing the interest paid, which can be used to claim this deduction, regardless of whether they itemize deductions or take the standard deduction.

Business Use of a Vehicle

Interest paid on an auto loan can be tax-deductible when the vehicle is used for business purposes. This deductibility requires the vehicle’s direct connection to an income-generating activity. Loan proceeds must be used for business, not personal, expenditures.

For sole proprietors and independent contractors, auto loan interest is a deductible business expense reported on Schedule C (Form 1040), Profit or Loss From Business. Partnerships and corporations can also deduct auto loan interest as an operating expense on their business tax returns.

The rules are different for employees who use their personal vehicles for work. Under the Tax Cuts and Jobs Act (TCJA), unreimbursed employee business expenses, which previously included vehicle expenses, are suspended from 2018 through 2025. This means that most employees cannot deduct auto loan interest, even if their employer does not reimburse them for work-related vehicle use. Limited exceptions apply for specific categories of workers, such as Armed Forces reservists, qualified performing artists, and fee-basis state or local government officials.

Defining business use is important for claiming this deduction. Business use includes activities like traveling to client sites, making deliveries, transporting tools or equipment, or providing ride-sharing services. However, commuting from home to a regular place of work is generally considered personal use and is not deductible. If a vehicle is used for both business and personal purposes, only the portion of the interest corresponding to the business use is deductible. For instance, if a vehicle is used 70% for business and 30% for personal reasons, only 70% of the interest paid on the loan can be deducted.

It is important to distinguish auto loan interest from qualified residence interest, which pertains to home equity loans or lines of credit (HELOCs). While interest on a home equity loan can be tax-deductible, it is only so if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. If a home equity loan is used to purchase a vehicle, the interest paid on that loan is generally not deductible under the qualified residence interest rules, as the funds were not used for home improvement. The loan must be secured by the taxpayer’s main or second home, and limits apply to the amount of debt on which interest can be deducted, currently $750,000 for debt incurred after December 15, 2017.

Claiming Deductions and Record Keeping

To claim an auto loan interest deduction for business use, sole proprietors typically report the deductible amount on Schedule C (Form 1040). Businesses may also need to use IRS Form 4562, Depreciation and Amortization, to provide information on the business use of vehicles and other listed property, even if they are not claiming depreciation on the vehicle. This form helps substantiate the business use percentage for various vehicle-related deductions.

Meticulous record-keeping is important when deducting auto loan interest for business use, as these deductions may attract IRS scrutiny. Essential documentation includes loan statements that clearly show the interest paid during the tax year. A detailed mileage log is also important, as it substantiates the percentage of business use versus personal use. For each business trip, a mileage log should record the date, destination, business purpose, and the vehicle’s starting and ending odometer readings to calculate miles driven. The IRS requires these records to be “contemporaneous,” meaning they are made at or near the time of the trip.

Receipts for other actual vehicle expenses, such as fuel, maintenance, and repairs, should also be retained if the actual expense method is used for vehicle deductions. Keeping records for at least three years, or longer if depreciation is involved, is generally advisable. For complex situations or to ensure compliance with current tax law, consulting a qualified tax professional is recommended.