Buying a Car For Your Business? New Interest Deduction Rules
IRS Finalizes Car Loan Interest Deduction Rules: What Taxpayers Should Know
The IRS has finalized the rules for the new car loan interest deduction in T.D. 10054, published in Internal Revenue Bulletin 2026-39 and effective November 9, 2026. The deduction is available for certain interest paid on qualifying passenger vehicle loans for tax years 2025 through 2028, and it can be claimed whether or not a taxpayer itemizes deductions. Under the statute, qualified passenger vehicle loan interest is excluded from “personal interest,” which normally is not deductible, and the deduction is also available to taxpayers who take the standard deduction. IRC § 163(h)(4)(A). IRC § 63(b)(7). T.D. 10054.
The Big Picture
For eligible taxpayers, up to $10,000 of qualified car loan interest per return may be deductible each year. The deduction is not unlimited, and not every vehicle loan qualifies. The final rules keep the core eligibility framework from the proposed regulations: the vehicle generally must be new to the taxpayer, must have final assembly in the United States, and the loan must be secured by a first lien on the vehicle and incurred after December 31, 2024, for the purchase of the vehicle for personal use. IRC § 163(h)(4)(B). IRC § 163(h)(4)(D). T.D. 10054.
Key Rules for Taxpayers
First, the deduction is capped at $10,000 per Federal tax return, regardless of filing status. If a taxpayer has more than one qualifying vehicle loan, the final regulations clarify that interest from multiple specified passenger vehicle loans may be aggregated before applying the $10,000 cap. IRC § 163(h)(4)(C)(i). T.D. 10054.
Second, the deduction phases out for higher-income taxpayers. After applying the $10,000 cap, the deduction is reduced by $200 for each $1,000, or part of $1,000, by which modified adjusted gross income exceeds $100,000, or $200,000 for joint filers. For this purpose, modified adjusted gross income generally means adjusted gross income increased by amounts excluded under sections 911, 931, or 933. IRC § 163(h)(4)(C)(ii).
Third, the original use of the vehicle must begin with the taxpayer. In plain English, this generally means the vehicle must be new to the buyer. The final rules do not extend the deduction to used or “nearly new” vehicles. The IRS did clarify that a dealer’s use of a vehicle as a demonstrator generally does not start original use if the vehicle is held primarily for sale to customers, but a vehicle previously used by a dealer as a service vehicle may be different. IRC § 163(h)(4)(D)(i). T.D. 10054.
Fourth, the vehicle’s final assembly must occur in the United States. Taxpayers may use the vehicle identification number, or VIN, and the vehicle’s final assembly information, such as the window sticker, to help verify this requirement. A vehicle model alone may not be enough, because the same model can sometimes be assembled in more than one country. IRC § 163(h)(4)(D). IRC § 163(h)(4)(E)(i). T.D. 10054.
Form 1098-VLI: Helpful, But Not the Final Word
The final regulations also implement lender reporting on Form 1098-VLI, Vehicle Loan Interest Statement. In general, a person engaged in a trade or business who receives $600 or more of interest from an individual during a calendar year on a specified passenger vehicle loan must file an information return and furnish a statement to the borrower. IRC § 6050AA(a). IRC § 6050AA(b). IRC § 6050AA(c). T.D. 10054.
Mandatory Form 1098-VLI reporting applies beginning with 2026 interest. For 2025 interest, the IRS provided transitional relief: a lender is treated as satisfying its 2025 reporting obligations if it makes available to the individual a statement showing the total amount of interest received in 2025 on a specified passenger vehicle loan. Notice 2025-57. T.D. 10054.
Importantly, receiving Form 1098-VLI does not automatically mean the interest is deductible. The final regulations specifically require the borrower statement to warn that the taxpayer may not be able to deduct the full amount shown. Taxpayers still need to confirm that the vehicle meets the original-use and U.S.-final-assembly requirements, that the loan qualifies, and that the MAGI phaseout does not reduce or eliminate the deduction. IRC § 163(h)(4)(C). IRC § 163(h)(4)(D). T.D. 10054.
What Changed From the Proposed Rules?
The basic eligibility rules did not change. The final regulations kept the same core framework: qualifying loan, qualifying vehicle, personal use, original use, U.S. final assembly, $10,000 annual cap, and MAGI phaseout. T.D. 10054.
The final rules did, however, add practical clarifications. For example, they clarify how “first lien” status works, expand explanations of vehicle categories such as pickup trucks and SUVs, address dealer demonstrator vehicles and joint purchasers, explain what types of interest and customary vehicle-financing charges may count, and confirm that negative equity from a trade-in loan is not part of the qualifying vehicle loan. T.D. 10054.
Practical Steps to Take Now
Clients considering this deduction should start with documentation. Keep the purchase agreement, loan documents, VIN, window sticker or other final-assembly documentation, and any lender statements. When Form 1098-VLI is issued, review it carefully, but do not rely on it alone.
Before claiming the deduction, estimate MAGI for the year, especially if income is near or above $100,000 for single filers or $200,000 for joint filers. Also watch for 2026 tax planning opportunities, since lender reporting will become more standardized and the deduction may affect year-end planning for vehicle purchases and financing.
If you purchased or are planning to purchase a qualifying vehicle, contact our firm before claiming the deduction. We can help review the loan, vehicle documentation, Form 1098-VLI, and income phaseout rules so the deduction is claimed correctly.
As always, speak with your CPA and financial professionals to see how this applies to your particular situation.
Quick Answers (FAQ)
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The deduction is limited to $10,000 of qualified passenger vehicle loan interest per Federal tax return each year. If you have more than one qualifying vehicle loan, interest from those loans may be aggregated before applying the $10,000 cap.
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After the $10,000 cap is applied, the deduction is reduced by $200 for each $1,000, or part of $1,000, that modified adjusted gross income exceeds $100,000, or $200,000 for joint filers. Modified adjusted gross income generally means adjusted gross income increased by amounts excluded under sections 911, 931, or 933.
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Generally, no. The vehicle’s original use must begin with the taxpayer, which usually means the vehicle must be new to the buyer; however, a dealer demonstrator vehicle may still qualify if the dealer held it primarily for sale to customers, while a dealer service vehicle may be treated differently.
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Keep the VIN, the window sticker, and any manufacturer or dealer information showing the final assembly point. A vehicle model alone may be insufficient because some models are assembled in more than one country.
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No. Form 1098-VLI is an information-reporting form, and deductibility still depends on whether the vehicle, loan, personal-use requirement, original-use requirement, U.S.-final-assembly requirement, and MAGI limits are satisfied.
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In general, a lender or other person in a trade or business must report when it receives $600 or more of interest from an individual during a calendar year on a specified passenger vehicle loan. Mandatory Form 1098-VLI reporting applies beginning with 2026 interest, while 2025 interest is covered by transitional relief if the lender makes an interest statement available to the borrower.
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No. The limit is per Federal tax return, not per owner or per borrower. Joint filers have a single $10,000 cap on the joint return.
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Keep the purchase agreement, loan documents, VIN, window sticker or other final-assembly documentation, Form 1098-VLI or lender interest statement, and income records needed to calculate MAGI. The VIN is especially important because the statute requires it to be included on the tax return for the interest to qualify.
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The final regulations kept the main eligibility rules but added practical clarifications, including rules on first-lien status, dealer demonstrator vehicles, joint purchasers, qualifying interest and financing charges, vehicle categories, and negative equity. T.D. 10054.
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Because the deduction depends on several facts—loan structure, vehicle eligibility, documentation, Form 1098-VLI reporting, and MAGI—clients should consult a tax advisor before claiming it. Our firm can help review the eligibility rules and supporting records under Section 163(h)(4).