Is Car Loan Interest Tax Deductible? Personal and Business Use

Yes, car loan interest is tax deductible, but only in specific situations. A 2025 law created a new federal deduction of up to $10,000 per year for interest on loans used to buy a new, American-assembled personal vehicle, available for tax years 2025 through 2028. Separately, self-employed taxpayers have long been able to deduct the business-use portion of interest on any car loan. Outside those two paths, personal car loan interest is not deductible on a federal return.

The New Personal Car Loan Interest Deduction

The One, Big, Beautiful Bill (OBBBA), signed in 2025, created a deduction the IRS calls “qualified passenger vehicle loan interest” (QPVLI). It’s the first time since 1986 that personal car loan interest has been deductible at the federal level. The deduction applies to tax years beginning after December 31, 2024, and before January 1, 2029, covering your 2025 through 2028 returns.¹

The maximum is $10,000 per return per year, regardless of filing status. You can claim it whether you take the standard deduction or itemize, and W-2 employees qualify alongside self-employed filers. You report it on the new Schedule 1-A (Form 1040), where it reduces your adjusted gross income directly.²

Which Vehicles and Loans Qualify

Not every car loan counts. The vehicle and loan must meet all of these conditions:¹

The vehicle must be new. Original use has to begin with you, so used cars are out.
Final assembly must have occurred in the United States. You can verify this using the plant-of-manufacture code in the VIN or the label required on the vehicle under federal regulations.
You must use the vehicle primarily for personal purposes, not in a trade or business.
Cars, SUVs, minivans, vans, pickup trucks, and motorcycles qualify. The vehicle has to weigh under 14,000 pounds (gross vehicle weight rating) and be designed for use on public roads.
The loan must be secured by a first lien on the vehicle, and the debt must have been incurred after December 31, 2024.

Refinances of pre-2025 loans don’t qualify, and neither does a loan on a used car, even a nearly new one.

Income Phaseout

The deduction shrinks as income rises. It’s reduced by $200 for every $1,000 (or fraction of $1,000) that your modified adjusted gross income exceeds $100,000 for single filers or $200,000 for married couples filing jointly.¹ That means the deduction disappears entirely at $150,000 for single filers and $250,000 for joint filers. If your income moves year to year, run the phaseout each time you file.

Business Use for Self-Employed Drivers

Separately from the new personal deduction, self-employed taxpayers and sole proprietors can deduct the business-use portion of car loan interest as a business expense. This rule predates the OBBBA and applies to any vehicle used in your trade or business, whether new or used, and regardless of where it was assembled. You report it on Schedule C (Form 1040), and it reduces both your adjusted gross income and your self-employment tax base.³

You can only deduct the percentage that matches your business use. If you drive 15,000 miles in a year and 9,000 are for business, your business-use percentage is 60%, and you can deduct 60% of the interest you paid that year.⁴ Personal miles, including your daily commute, don’t count as business use.

One more note for self-employed drivers who use the IRS standard mileage rate: that rate bundles gas, insurance, repairs, and depreciation into a single per-mile number, but it does not cover car loan interest. You can still deduct the business portion of your interest separately on Schedule C.⁴

When One Loan Covers Both Personal and Business Use

If you’re self-employed and your vehicle also qualifies for the new personal deduction (new, American-assembled, and used partly for personal driving), you can split the interest. Deduct the business portion on Schedule C and the personal portion on Schedule 1-A. You cannot deduct the same dollar of interest twice.⁴

What W-2 Employees Can and Cannot Claim

If you’re a W-2 employee who uses your personal car for work, the Tax Cuts and Jobs Act of 2017 eliminated the federal deduction for unreimbursed employee business expenses. That suspension runs through 2025 and was not restored by the OBBBA. So you cannot deduct the business-use portion of car loan interest as an employee expense on your federal return.

You can still claim the new personal QPVLI deduction if you bought a qualifying new, American-assembled vehicle. That deduction is based on personal use and income, not on employment status, and it’s available to any individual taxpayer who meets the requirements.⁵

Only Interest Counts, Not Principal

Whichever deduction you claim, only the interest portion of your monthly payment qualifies. The principal, which pays down what you borrowed, is never deductible. Your lender’s year-end statement (Form 1098 or an annual summary) breaks out how much of your payments went toward interest versus principal.¹

For business vehicles, the cost of the car itself is recovered through depreciation over several years rather than through principal payments.

Records to Keep

For the personal QPVLI deduction, the paperwork is light. Hold on to your lender’s annual interest statement, your purchase paperwork, and the VIN so you can confirm U.S. final assembly if the IRS asks.

For a business-use claim, the IRS expects contemporaneous records: information written down at or near the time of each trip, not reconstructed from memory at year-end. A mileage log should show, for each business trip, the date, starting point and destination, business purpose, and miles driven, plus your odometer reading at the start and end of the tax year.⁴ Smartphone apps that log GPS data in real time are the easiest way to build an audit-proof record. If you use a spreadsheet or paper log, enter each trip the same day. Year-end reconstructions are exactly the kind of evidence that falls apart under scrutiny.

1
Federal Register. Car Loan Interest Deduction
2
Internal Revenue Service. 2025 Schedule 1-A (Form 1040)
3
Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
4
Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses
5
Internal Revenue Service. Treasury, IRS Provide Guidance on the New Deduction for Car Loan Interest Under the One, Big, Beautiful Bill