One way to recover some money during tax season is through tax deductions, which are reductions of income that are able to be taxed and are commonly a result of expenses. There are many types of tax deductions, one of which is car loan interest.
Car loans are common for American households. According to Experian, the average car loan amount reached $34,439 in the second quarter of 2022. With interest rates on auto loans ranging from 3% to 10% or more, interest charges can add hundreds of dollars to the total cost of a car purchase over the life of a loan. This leads many taxpayers to wonder – can you deduct car loan interest from your taxes?
The short answer is typically no. Personal car loan interest is not tax deductible for most taxpayers. However there is an exception if you use the car for business. Here is what taxpayers need to know about deducting car loan interest.
Personal Car Loan Interest Is Not Deductible
In general, you cannot deduct interest paid on a car loan for a vehicle used for personal purposes only. The IRS does not allow taxpayers to deduct interest on personal loans, including interest paid on auto loans.
Personal car loan interest falls into the category of personal, living or family expenses that are nondeductible according to the tax code. Some examples of other nondeductible personal interest expenses are credit card interest, payday loan interest, and mortgage interest on a home equity loan not used to improve your home.
So if you take out a car loan to purchase a vehicle solely for personal use – commuting to your job, driving kids to school, running errands, etc. – you cannot deduct the interest on your taxes.
Business Use Car Loan Interest Is Partially Deductible
There is one scenario in which you may be able to deduct car loan interest. If you use the car for business purposes, you can deduct the business-use portion of interest as a business expense.
Self-employed individuals, independent contractors, LLC members, and business partners who use a car for business may qualify for a partial deduction
To claim the deduction you must use the car at least partially for business. Examples include
- Real estate agents driving to show homes
- Independent contractors driving to meet clients
- Delivery and transportation services using a car to deliver goods or provide rides
- LLC members visiting multiple business locations
- Sales reps traveling to meet customers
In addition, the car must be registered, insured, and used primarily by the business owner or employee claiming the deduction.
Calculating the Deductible Amount
If the car has both business and personal use, you can only deduct the business portion of the interest.
- Calculate the business use percentage
- For example, if you use the car 50% for business purposes and 50% for personal purposes, your business use percentage is 50%
- Multiply total interest paid by this percentage
- If you paid $1,000 in car loan interest, deductible amount is $1,000 x 50% = $500
Be sure to keep detailed mileage logs and records that distinguish business vs. personal use. The IRS may ask for this documentation.
The deduction for car loan interest is claimed on Schedule C for sole proprietors or Schedule E for rental property.
Claiming the Car Loan Interest Deduction
Follow these steps to claim your partially deductible car loan interest:
-
Track business vs. personal mileage – Keep a log of business miles driven, such as miles driven to meet clients or commute to a business location. Calculate your overall business use percentage based on mileage.
-
Calculate deductible interest – Multiply your business use percentage by the total interest paid on the car loan during the tax year.
-
Claim on Schedule C or E – Report your deductible business auto interest expense on Schedule C (Form 1040) if you are a sole proprietor, or Schedule E (Form 1040) if the car is used for rental property business.
-
Keep records – Maintain mileage logs, loan interest statements, and other records to support your deduction in case of an IRS inquiry.
Limits and Restrictions
Certain limits and restrictions apply when deducting car loan interest:
- You can only deduct the business use portion of interest, not the full amount.
- The car must be used regularly and primarily for business purposes. Occasional business use does not qualify.
- Only interest is deductible, not the principal loan payments.
- You cannot deduct auto loan interest to reduce passive activity income on a rental property.
- Employees cannot deduct car loan interest for an employer-provided vehicle.
Impact on Personal Taxes
Claiming a deduction for auto loan interest can help reduce your taxable business income if you are self-employed or use a car for business. However, the impact depends on your tax situation.
Factors that influence whether the deduction will lower your taxes include:
- Your tax bracket – Deductions provide bigger tax savings for those in higher brackets.
- Whether you take the standard deduction – You cannot claim car loan interest in addition to the standard deduction. You must itemize.
- Other deductions claimed – Total itemized deductions must exceed your standard deduction to benefit.
Meet with your tax professional to determine how deducting car loan interest will impact your tax return. Keep detailed records to support your business use vehicle expenses.
The Bottom Line
Personal car loan interest is not tax deductible. But if you use a vehicle for business, you may deduct a portion of the interest equal to the business use percentage. Be sure to keep detailed mileage logs and records to substantiate your business use. Consult a tax professional to understand how this deduction can impact your tax liability. With proper documentation, deducting car loan interest can provide some tax savings for small businesses and self-employed borrowers.
Standard mileage rate method
This is a straightforward way to calculate deductions because you don’t need to keep track of purchases. You simply need to know how many miles you drove for business during the year.
The easiest way to track mileage is with a mileage log, which allows you to note business mileage vs. personal mileage. To calculate your deduction, multiply the standard mileage rate (the final 2022 rate was 62.5 cents per mile, up from 58.5 cents per mile during the first half of 2022) by the number of miles you drove for business. If you drove 3,000 miles for work, you would calculate like this:
- 1,500 x 0.585 = $877.50 (split the total miles between the standard mileage rate from the first half of 2022 and the second half of 2022)
- 1,500 x 0.625 = $937.50
- $877.50 + $937.50 = $1,815 standard mileage deduction
If you drive a lot for work (Uber or Lyft driver, delivery driver, etc.), the standard mileage rate is the best option to maximize your tax deduction.
When car loan interest is not tax-deductible
Even if you primarily use your car for commuting, you may not deduct your car loan interest for personal use.
How to Write Off a Vehicle in 2024 (NEW Tax Code Changes)
FAQ
Can interest on a car loan be deducted on taxes?
How much of my car payment can I write off?
Can I claim a car purchase on my taxes TurboTax?
Can I use my car as a tax write off?
Can I deduct car loan interest as a business expense?
If you use your car for business purposes you may be allowed to partially deduct car loan interest as a business expense. If you use your car for business purposes, you may be able to deduct actual vehicle expenses. But you will need to keep accurate records of your business expenses to show proper use of the vehicle.
Is car loan interest tax deductible?
Car loan interest is deductible in certain situations where you use your vehicle for business purposes. Only those who are self-employed or own a business and use a vehicle for business purposes may claim a tax deduction for car loan interest. If you are an employee of someone else’s business, you cannot claim this deduction.
Can I deduct auto loan interest expenses if I work for someone?
If you’re an employee working for someone else, you can’t deduct auto loan interest expenses, even if you use the car 100% for business purposes. When you file your taxes with the Internal Revenue Service (IRS), there are many rules about what can be deducted, and how.
Can I claim car loan interest on my tax return?
Only those who are self-employed or own a business and use a vehicle for business purposes may claim a tax deduction for car loan interest. If you are an employee of someone else’s business, you cannot claim this deduction. In addition, interest paid on a loan used to purchase a car solely for personal use is not deductible.