Auto loan interest can be tax deductible, but only in two specific situations. If you use the vehicle for business, you can deduct the business-use share of the interest as a business expense. And for tax years 2025 through 2028, a new law lets individuals deduct interest on a loan used to buy a new, American-assembled personal vehicle, even without any business use. Everything else — commuting, personal errands, a car bought before 2025, a used car, a lease — falls outside both rules.
Business Use Is the Original Path
Federal tax law disallows deductions for personal interest, and a car loan for commuting or personal driving counts as personal.1Office of the Law Revision Counsel. 26 USC 163 – Interest The exception is a vehicle used in a trade or business. Under Section 162, expenses that are “ordinary and necessary” for your business are deductible, and the interest you pay to finance a work vehicle qualifies.2Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
A rideshare driver, a plumber hauling tools, or a salesperson driving between client sites clearly meets that standard. Someone commuting from the suburbs to a desk job does not. What matters is the character of the driving, not the type of loan or the kind of car.
The deduction is limited to your business-use percentage: business miles divided by total miles for the year. That percentage applies to loan interest and to every other actual expense. Use the car 70% for business, and 70% of the interest is deductible. A mileage log is what establishes the percentage, and without one the deduction does not hold up.
You Have to Pick the Right Method
How you calculate your business vehicle deduction decides whether you can claim loan interest at all.
Standard Mileage Rate
The simpler option. For 2026, the IRS rate is 72.5 cents per business mile.3Internal Revenue Service. 2026 Standard Mileage Rates – Notice 2026-10 That figure already includes a component for depreciation, fuel, insurance, and financing costs. Because financing is baked in, you cannot separately deduct loan interest on top of it. Multiply business miles by the rate and you’re done.
You generally must choose this method in the first year you place the vehicle in service for business. You can switch to the Actual Expense method later, but going back has restrictions.
Actual Expense Method
This is the path that lets you deduct loan interest. You track every dollar spent on the vehicle — fuel, oil changes, tires, repairs, insurance, registration, and loan interest — then multiply the total by your business-use percentage. Depreciation is claimed alongside the actual expenses.
The Actual Expense method tends to produce a larger deduction when the vehicle is expensive, the interest rate is high, or the vehicle qualifies for accelerated depreciation. The trade-off is paperwork. Every receipt matters.
The New Personal Auto Loan Interest Deduction
Starting with tax year 2025, individual taxpayers can deduct interest on a loan used to buy a new personal-use vehicle, even if there is zero business use. The One, Big, Beautiful Bill Act created this deduction, and it runs through 2028.4Internal Revenue Service. One, Big, Beautiful Bill Act: Tax Deductions for Working Americans and Seniors You do not need to itemize to claim it; it works alongside the standard deduction.5Internal Revenue Service. Treasury, IRS Provide Guidance on the New Deduction for Car Loan Interest Under the One, Big, Beautiful Bill
What Qualifies
The vehicle must be new (original use starts with you), undergo final assembly in the United States, weigh under 14,000 pounds GVWR, and be purchased for personal use. The loan must have been originated after December 31, 2024, and secured by a lien on the vehicle. Used vehicles, lease financing, fleet purchases, and salvage-title vehicles do not qualify.1Office of the Law Revision Counsel. 26 USC 163 – Interest You must include the vehicle identification number on your tax return for every year you claim the deduction.
Caps and Income Limits
The annual deduction caps at $10,000. It phases out for taxpayers with modified adjusted gross income above $100,000 ($200,000 for joint filers).6Internal Revenue Service. Publication 6126 – Purchased a New Vehicle? If you refinance a qualifying loan, interest on the refinanced amount generally remains eligible.
Mixed-Use Vehicles
If you use the same vehicle partly for business, you don’t get to deduct the same interest twice. The business share goes on your business return as usual, and the remaining personal share may qualify under the new deduction if the vehicle meets the requirements. Vehicles used entirely for business (commercial vehicles) are excluded from the personal deduction altogether.
Lender Reporting
Lenders that receive $600 or more in interest on a qualifying vehicle loan must now furnish Form 1098-VLI (Vehicle Loan Interest Statement).7Internal Revenue Service. Form 1098-VLI – Vehicle Loan Interest Statement This is new; before, lenders had no obligation to report auto loan interest. If your loan predates the new rules or the vehicle doesn’t qualify but you’re claiming interest as a business expense, request a year-end interest statement from the lender directly.
W-2 Employees Are Out
If you’re a W-2 employee using your personal car for work, you cannot deduct vehicle expenses, including auto loan interest, on your federal return. The Tax Cuts and Jobs Act suspended the miscellaneous itemized deduction for unreimbursed employee expenses, and the One, Big, Beautiful Bill extended that rule.8Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile, Up 2.5 Cents Narrow exceptions exist for Armed Forces reservists, qualifying performing artists, fee-basis state or local government officials, and eligible educators, but they cover very few taxpayers.
If your employer reimburses you under an accountable plan (you substantiate expenses and return any excess), the reimbursement isn’t taxable to you and the employer takes the deduction. Without a reimbursement, most employees get no federal deduction, though a handful of states still allow one on the state return.
Leased Cars Don’t Generate Deductible Interest
A lease is not a loan, so there is no interest to deduct. For a business lease, you deduct the business-use share of each lease payment under the Actual Expense method. The IRS also requires an “inclusion amount” added to income when the leased vehicle’s fair market value exceeds a threshold in IRS Publication 463, which prevents leasing from being an end-run around the luxury auto depreciation caps.
The new personal auto loan interest deduction also does not apply to lease financing. If you lease a car for personal use, that deduction is off the table.
Records That Make the Deduction Hold Up
The mileage log is the document that decides whether a business vehicle deduction survives an audit. Without it, the IRS can disallow everything.
A compliant log records five things for every business trip: the date, starting point and destination, business purpose, and miles driven. Record your odometer reading at the start and end of the tax year, and whenever you begin or stop using the vehicle for business. Entries need to be made at or near the time of the trip. A log that looks like it was filled in all at once during tax season draws skepticism.
Phone apps that track GPS mileage automatically satisfy the contemporaneous-records requirement. Keep all vehicle-related receipts, including lender interest statements, for at least three years from the date you file.9Internal Revenue Service. Topic No. 305, Recordkeeping If you underreport income by more than 25%, the IRS has six years to audit, so longer retention is wise when there’s any doubt.
Overstating business use isn’t just an audit risk. The IRS imposes a 20% accuracy-related penalty on underpayments attributable to negligence or disregard of the rules.10Internal Revenue Service. Accuracy-Related Penalty That’s on top of the additional tax and interest.
Where to Report It
Sole proprietors and single-member LLCs report vehicle expenses on Schedule C (Form 1040), line 9.11Internal Revenue Service. Instructions for Schedule C (Form 1040) Part IV of Schedule C asks about total mileage, business mileage, and whether you have written evidence to support the claim. If you’re also claiming depreciation on the vehicle, file Form 4562.12Internal Revenue Service. About Form 4562, Depreciation and Amortization
Partnerships report through Form 1065, S corporations through Form 1120-S, and C corporations through Form 1120. The math is the same: business-use percentage applied to actual expenses, including loan interest. If the corporation owns the vehicle and a shareholder-employee drives it, the business-use percentage belongs to the corporation. If the shareholder owns the vehicle personally, the corporation can reimburse under an accountable plan and deduct the reimbursement.