Is Car Loan Interest Tax Deductible in 2022? Everything You Need to Know

Paying interest on a car loan can be a big expense, especially if you have a long loan term. With interest rates on the rise, monthly payments are getting even more painful. That’s why many people wonder – can you deduct car loan interest on your taxes?

The answer isn’t straightforward. Some car loan interest is deductible, while other interest is not. It depends on how you use the vehicle and a few other factors. Keep reading to find out when you can and cannot deduct interest on a car loan on your 2022 taxes.

When Is Car Loan Interest Tax Deductible?

In general, interest paid on personal loans, car loans, and credit cards is not tax deductible However, there are some cases where you may be able to deduct interest on a car loan when you file your taxes

• If you are self-employed or have your own business – Self-employed taxpayers and small business owners who use a vehicle for business purposes can deduct car loan interest. You must use the car at least partially for your business.

• If the car is used 100% for business – If you use the car 100% of the time for business purposes, you can deduct 100% of the interest. Keep detailed mileage logs.

• If the car has mixed business and personal use – In this case you can only deduct the percentage of interest equal to the percentage of business use of the vehicle For example, if you use the car 50% for business, you can deduct 50% of the interest

In all cases, you must be the borrower on the car loan to deduct the interest. Employees cannot deduct interest paid on a car their employer provides.

Documentation Needed to Deduct Car Loan Interest

To deduct car loan interest for a vehicle used for business, you must have documentation of the following:

• Odometer log or mileage tracking showing all trips/mileage for business purposes
• Receipts or statements showing interest paid on the auto loan
• Receipts for any parking, tolls, or other costs associated with business use (these are not deductible like interest, but help document business use)

It’s recommended to keep at least 3 years of documentation on hand in case of an audit.

How to Calculate the Deductible Amount

When using a car for both business and personal, the deductible amount of interest gets a little tricky to calculate. Here are the steps:

1. Add up all business miles driven for the year and all total miles driven.
2. Divide business miles by total miles to get the percentage of business use.
3. Multiply the percentage by the total interest paid that year to find the deductible amount.

For example:

• Total miles driven: 15,000
• Business miles driven: 7,500
• Percentage of business use: 7,500/15,000 = 50%
• Interest paid: $1,200
• Deductible interest: $1,200 x 50% = $600

So in this example you could deduct $600 of the $1,200 in interest paid.

Common Situations When Car Loan Interest Is Not Deductible

While car loan interest is deductible in some cases, there are many common situations when it is not deductible:

• Interest paid on a car used 100% for personal purposes
• Interest paid by an employee on a car provided by their employer
• Interest paid on a car loan by someone who is not self-employed
• Interest paid on a personal loan used to purchase a car

Basically, the interest has to be tied directly to a car that you own and use for your own business. Any personal use of the car reduces the deductible amount.

Should You Deduct Car Loan Interest?

Claiming deductions on your taxes is tempting. But before you deduct car loan interest, be sure it makes sense for your situation.

You’ll want to run the numbers to see if the deduction is worth the extra documentation required. If your business use of the vehicle is low, the deductible amount may be small and not worth the effort.

Consult a tax professional if you are unsure whether deducting interest is advantageous based on your specific circumstances. They can help maximize your deductions.

Changes for the 2022 Tax Year

No major changes were made that affect deducting auto loan interest for the 2022 tax year. The same general rules and guidance from the IRS still applies.

One thing that did change is the standard mileage rate for 2022 business driving, which increased to 58.5 cents per mile, up 2.5 cents from the 2021 rate. This is separate from the interest deduction but also provides a tax benefit for business auto use.

The Bottom Line

• Car loan interest is only deductible if you use the vehicle for your own business. No deduction is allowed for personal use vehicles.

• If the vehicle has mixed business and personal use, you can only deduct the percentage of interest proportional to the percentage of business use. Maintain detailed mileage logs.

• Employees cannot deduct interest paid on a vehicle provided by their employer, even if they use it for business. Only self-employed taxpayers or business owners can claim the deduction.

• Work with a tax professional to determine if deducting auto loan interest makes sense for your situation based on the amount of business use and interest paid.

While this deduction can provide nice tax savings, be sure you qualify based on your specific circumstances and use. Make sure to have the proper documentation showing your business mileage and loan interest paid. Follow these rules carefully when deducting car loan interest on your 2022 taxes.