Is Car Loan Interest Tax Deductible?

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Car loan interest can be tax deductible, but only in specific situations. If you’re a business owner or self-employed and use the vehicle for work, you may be able to deduct some of all of the interest as a business expense.

Here’s when car loan interest qualifies, how to calculate your deduction and how to claim it at tax time.

Is Car Loan Interest Tax Deductible for Personal Use?

Car loan interest is not tax deductible if the car is used solely for personal reasons.

The IRS classifies this as personal interest, which isn’t eligible for a tax break. That means if you use your car for commuting, errands or general personal use, you can’t deduct the interest on your tax return.

When Can You Deduct Car Loan Interest for Business Use?

Car loan interest may be tax deductible if:

• You’re self-employed or a business owner.
• You use your car for business purposes.
• You deduct only the interest portion tied to business use.

If you’re an employee, even using your car 100% for work doesn’t qualify you to deduct the loan interest — it’s still considered personal interest. However, you may be eligible for a standard mileage rates deduction on unreimbursed business miles.

If you’re self-employed and use the car for business, you can deduct the portion of your interest tied to business use.

Example: How Business Use Affects Your Deduction

If you use your car 40% of the time for business, you can deduct 40% of the interest paid on your auto loan. The remaining 60% tied to personal use isn’t eligible for a tax deduction.

How To Calculate the Deduction for Mixed-Use Vehicles

Follow these steps to figure out your deduction:

1. Find your total annual interest paid: Use your loan’s year-end summary or monthly statements.
2. Determine your business-use percentage: Track your total mileage and how many of those miles were business-related.
3. Multiply your total interest by your business-use percentage: Here’s an example of how to calculate this:
   • $1,500 in interest X 40% business use = $600 deductible interest
4. Keep supporting documents: Hold onto mileage logs and payment records in case of an IRS audit.

Additional Tax-Deductible Expenses for Business Vehicles

If you use the actual expense method (instead of the standard mileage rate), you may also be able to deduct:

• Depreciation
• Lease payments
• Licenses
• Gas
• Oil
• Tolls
• Insurance
• Garage rent
• Parking fees
• Registration fees
• Repairs
• Tires

How To Claim the Car Loan Interest Deduction

Follow this step-by-step guide to claim the deduction on your tax returns:

Step 1: Confirm Eligibility

Make sure you’re self-employed or a business owner using the car for business purposes.

Step 2: Gather Documentation

Collect loan statements showing the total interest paid, plus receipts and a mileage log for your business-related car use.

Step 3: Choose a Deduction Method

You can deduct other car expenses using either the standard mileage rate or the actual expense method. 

• Standard mileage rate:
  • This method allows you to deduct a set rate per mile driven for business.
  • For the 2024 tax year, it’s 67 cents per mile.
  • Includes operating costs, so you can’t separately deduct interest.

• Actual expense method:
  • Allows you to deduct a portion of interest and other vehicle costs based on business use.

Step 4: Calculate Your Deduction

• For the actual expense method: Multiply total interest by your business-use percentage.

• For the mileage method: Multiply your business miles by the IRS rate. For example, 1,250 business miles X $0.67 = $837.50.

Step 5: Report the Deduction

Use Schedule C (Form 1040) if you’re self-employed. Enter car-related deductions on Line 9 under the “Car and Truck Expenses” section.

If you’re a farmer, you can use Schedule F (Form 1040) to deduct farming-related vehicle expenses.

The Bottom Line

Car loan interest is deductible only if you’re self-employed or a business owner and the vehicle is used for work. To claim the deduction, track your mileage, select the right method and maintain accurate documentation. If you’re unsure whether you qualify, consult a tax professional for guidance.

Elizabeth Constantineau contributed to the reporting for this article.

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