Is Interest on Car Loans Tax Deductible?
Is your car loan interest tax deductible? Understand the rules for personal vs. business use and how it impacts your taxes.
Interest paid on a car loan can be a significant expense, and many individuals wonder if these costs offer tax benefits. For most people, interest paid on a car loan for personal transportation is not tax deductible. Exceptions exist, primarily related to using the vehicle for business purposes or under new temporary legislation for personal use vehicles.
Understanding Personal Car Loan Interest
Interest paid on a loan for personal car purchases is generally not tax deductible. The Internal Revenue Service (IRS) classifies this as non-deductible personal interest. This aligns with other personal expenses, like interest on credit card balances. The loan’s purpose, financing personal transportation, determines its non-deductibility.
A temporary exception applies for tax years 2025 through 2028 under the “One Big Beautiful Bill Act.” Individuals may deduct interest paid on a loan for a qualified personal vehicle. To qualify, the vehicle must be new, with its original use starting with the taxpayer, and assembled in the United States. The loan must originate after December 31, 2024, and be secured by a lien on the vehicle, with lease payments not qualifying.
This deduction has a maximum annual limit of $10,000. It phases out for taxpayers with a modified adjusted gross income exceeding $100,000 for single filers and $200,000 for joint filers. Taxpayers claiming this deduction must include the vehicle identification number (VIN) on their tax return for any year the deduction is claimed.
When Car Loan Interest Can Be Deductible for Business Use
While personal car loan interest is generally not deductible, an exception arises when a vehicle is used for business purposes. Business owners and self-employed individuals may deduct a portion of their car loan interest if the vehicle is used in their trade or business. This applies whether the vehicle is used entirely for business or for both business and personal reasons.
For a vehicle used for both personal and business activities, only the percentage of car loan interest corresponding to the vehicle’s business use is deductible. For example, if a vehicle is used 60% for business and 40% for personal use, 60% of the interest paid would be deductible. Business use includes traveling to meet clients, visiting a business bank, or attending meetings with an accountant or lawyer related to the business.
This business-use deduction is typically available to sole proprietors and partners. Employees generally cannot claim this deduction, even if they use their personal car for work-related purposes. The IRS considers interest paid on indebtedness allocable to a trade or business as deductible.
Key Requirements for Business Use Deductions
Claiming a deduction for business-related car loan interest requires meticulous record-keeping. Taxpayers must maintain detailed records, including mileage logs documenting the date, destination, business purpose, and odometer readings for each business trip. These records should also track total miles driven for the year and for business, allowing calculation of the business use percentage.
The business use percentage, determined by dividing business miles by total miles, is applied to the total car loan interest paid for the year. For example, if a business vehicle accumulates 20,000 miles in a year, and 12,000 of those miles are for business, the business use percentage is 60%.
Taxpayers have two methods for deducting vehicle expenses: the standard mileage rate and the actual expense method. Car loan interest is a component of the actual expense method, which allows deduction of specific costs like gas, oil, repairs, insurance, and depreciation. If the actual expense method is chosen in the first year a vehicle is used for business, it must generally be used for that vehicle in all subsequent years.
Even when using the standard mileage rate, car loan interest attributable to business use is deductible. The standard mileage rate covers operating costs, but car loan interest, along with business-related parking fees and tolls, can be deducted separately. If the standard mileage rate is selected in the first year of business use for a vehicle, taxpayers retain flexibility to switch to the actual expense method in later years if it proves more advantageous.
Distinguishing Car Loan Interest from Other Loan Interest
Car loan interest differs from other loan interest used to finance a vehicle, as tax deductibility rules vary based on the loan’s purpose. A traditional car loan is secured by the vehicle itself and taken out for its purchase. Interest on such a loan is generally not deductible for personal use, with the temporary exception for 2025-2028.
Conversely, interest on a home equity loan or line of credit (HELOC) used to purchase a car is generally not deductible as qualified home mortgage interest. For HELOC interest to be deductible, funds must be used to buy, build, or substantially improve the taxpayer’s main or second home that secures the loan. Using HELOC funds for a car purchase, or other personal expenses, disqualifies the interest.
Similarly, interest on personal loans is typically not tax deductible. However, if proceeds from a personal loan are used exclusively for business purposes, the interest paid may be deductible as a business expense. The deductibility stems from the business use of the funds, not the loan type itself. The IRS focuses on how borrowed money is utilized.