Can You Deduct Interest on Car Loan? 2026 Tax Rules for Business Owners

For the 2026 tax year, business owners gained a powerful new deduction. The One Big Beautiful Bill Act (OBBBA) introduced a temporary provision allowing taxpayers to deduct interest on car loan payments up to $10,000. This new benefit applies to qualifying vehicles assembled in the United States. Understanding how to maximize this deduction requires careful planning and compliance with IRS eligibility requirements.

Table of Contents

• Key Takeaways
• What Is the New Car Loan Interest Deduction for 2026?
• Who Qualifies to Deduct Interest on Car Loan Payments?
• How Does Business vs Personal Use Affect Deductions?
• What Are the Best Tax Strategies for Vehicle Purchases in 2026?
• How Do You Claim the Car Loan Interest Deduction?
• What Mistakes Should Business Owners Avoid?
• How Does This Interact with Other Business Deductions?
• Uncle Kam in Action: Real Estate Investor Saves $8,200
• Next Steps
• Frequently Asked Questions
• Related Resources

Key Takeaways

• The 2026 OBBBA allows deduction of car loan interest up to $10,000 annually.
• Vehicles must be assembled in the U.S. and purchased new to qualify.
• Business owners can combine this with bonus depreciation and Section 179 expensing.
• Mixed-use vehicles require allocation between business and personal use percentages.
• Multi-year tax modeling helps maximize benefits and avoid loss limitations.

What Is the New Car Loan Interest Deduction for 2026?

The One Big Beautiful Bill Act introduced sweeping tax strategy changes for 2026. Among the most significant for business owners is the ability to deduct interest on car loan financing. This provision was designed to stimulate domestic automobile manufacturing. However, it comes with strict eligibility requirements that taxpayers must understand to properly claim the benefit.

The deduction applies to interest paid on loans used to purchase qualifying vehicles. Therefore, only the interest portion of your monthly payment is deductible. The principal repayment does not qualify. This distinction matters significantly when calculating your total tax benefit. For many business owners, the interest component represents approximately 30-40% of early loan payments.

Legislative Background of the OBBBA

The OBBBA passed as comprehensive tax reform legislation. Congress designed it to provide both immediate relief and long-term planning certainty. Moreover, the act made several business deductions permanent. These include the 20% qualified business income (QBI) deduction, 100% bonus depreciation, and immediate expensing for domestic research and development costs. Consequently, business owners now have multiple tools to reduce their tax burden.

According to IRS guidance, the car loan interest deduction is temporary. As a result, taxpayers should maximize this benefit while available. The provision specifically targets vehicles assembled domestically. This requirement aligns with broader economic policy goals of supporting American manufacturing jobs.

How the $10,000 Cap Works

The $10,000 annual limit applies per taxpayer, not per vehicle. Therefore, if you finance multiple qualifying cars, your total deduction cannot exceed $10,000. This cap includes all eligible interest payments across all qualifying loans. Furthermore, married couples filing jointly share one $10,000 limit. They cannot each claim separate $10,000 deductions.

Let’s examine how this works in practice. Suppose you pay $12,000 in qualifying car loan interest during 2026. You can only deduct $10,000. The remaining $2,000 provides no tax benefit. Additionally, this cap does not carry forward to future years. Each tax year stands alone with its own $10,000 maximum.

Who Qualifies to Deduct Interest on Car Loan Payments?

Eligibility for the car loan interest deduction requires meeting three critical requirements. First, the vehicle must have final assembly in the United States. This information appears on the window sticker of new vehicles. Second, you must purchase the vehicle new, not used. Third, the loan must be secured by the vehicle itself. Personal loans or credit cards used to buy cars do not qualify.

Vehicle Assembly Requirements

The U.S. assembly requirement follows Department of Transportation standards. A vehicle qualifies as U.S.-assembled if final assembly occurs at a domestic facility. Importantly, this differs from where individual components are manufactured. Many vehicles contain foreign-made parts but qualify because of domestic final assembly. Therefore, check the Monroney label on your vehicle’s window for assembly location.

Popular qualifying vehicles include many trucks, SUVs, and sedans. For example, vehicles assembled in Michigan, Ohio, Tennessee, and Texas typically qualify. However, vehicles imported from Mexico, Canada, or overseas generally do not meet requirements. Consequently, buyers should verify assembly location before finalizing any purchase.

New vs Used Vehicle Restrictions

The new vehicle requirement is straightforward. You must be the original purchaser. Used vehicle purchases do not qualify, even if the vehicle was originally U.S.-assembled. Additionally, certified pre-owned vehicles fall under the used category. Therefore, they do not qualify for the interest deduction regardless of their condition or certification status.

This restriction significantly impacts strategy. Business owners considering vehicle acquisitions should weigh the tax benefits of new purchases against potential savings from buying used. Nevertheless, when combined with other deductions like bonus depreciation, new vehicles often provide superior tax benefits.

Secured Loan Documentation

Your loan documents must clearly show the vehicle as collateral. Standard auto loans from banks, credit unions, or dealership financing typically meet this requirement. However, personal lines of credit or unsecured business loans do not qualify. Even if you use proceeds to purchase a vehicle, the loan must be specifically secured by that vehicle.

Lease payments present unique considerations. Generally, leases are not structured as secured loans. Therefore, the car loan interest deduction does not apply to leased vehicles. Instead, business lessees continue using the standard mileage rate or actual expense method for tax preparation and filing purposes.

How Does Business vs Personal Use Affect Deductions?

Most business owners use vehicles for both business and personal purposes. Consequently, IRS rules require allocation of expenses between these uses. The car loan interest deduction follows this same principle. You can only deduct the business use percentage of your interest payments. Therefore, meticulous mileage tracking becomes essential.

Calculating Business Use Percentage

To determine business use percentage, maintain detailed mileage logs. Record total miles driven and business miles separately. The formula is simple: business miles divided by total miles equals business use percentage. For example, if you drive 20,000 total miles and 15,000 are business miles, your business use is 75%.

This percentage applies to all vehicle expenses, including loan interest. If you paid $8,000 in car loan interest and have 75% business use, you can deduct $6,000. However, remember the $10,000 annual cap applies to total deductible interest. Moreover, the IRS may scrutinize high business use percentages. Therefore, documentation is critical.

Documentation Requirements

The IRS requires contemporaneous records. This means tracking mileage as it occurs, not reconstructing records later. Acceptable methods include:

• Manual mileage logs with date, destination, purpose, and miles
• GPS-based mileage tracking apps approved for tax purposes
• Digital calendar entries with trip details
• Employer reimbursement records for business travel

Additionally, save all loan statements showing interest paid. Your lender typically provides Form 1098 or a year-end statement. These documents substantiate your interest deduction claim. Furthermore, keep the vehicle purchase agreement showing assembly location and new vehicle status.

100% Business Use Vehicles

Some business vehicles have exclusively business use. Examples include delivery vans, specialized work trucks, or vehicles used solely for business operations. These qualify for 100% deduction of loan interest, up to the $10,000 cap. However, the IRS applies strict scrutiny to 100% business use claims.

To substantiate 100% business use, consider these strategies. First, have another vehicle available for personal use. Second, maintain the business vehicle at your place of business, not your home. Third, document any rare personal use and treat it as taxable compensation. Nevertheless, even with these precautions, expect potential IRS questions during audits.

What Are the Best Tax Strategies for Vehicle Purchases in 2026?

The 2026 tax landscape offers unprecedented opportunities for business owners purchasing vehicles. The OBBBA made 100% bonus depreciation permanent. Additionally, entity structuring impacts how you claim these deductions. Therefore, strategic planning can generate substantial tax savings.

Stacking Multiple Deductions

Business owners can layer several deductions on the same vehicle purchase. First, deduct the purchase price using bonus depreciation or Section 179 expensing. Second, deduct the car loan interest payments. This combination provides both immediate and ongoing tax benefits. However, each deduction has specific rules and limitations.

For example, consider purchasing a $60,000 truck with 80% business use. You finance $50,000 at 6% interest. Here’s your potential tax benefit breakdown:

Deduction Type	Calculation	Tax Benefit
Bonus Depreciation	$60,000 × 80% = $48,000	$48,000 first year
Car Loan Interest (Year 1)	$3,000 × 80% = $2,400	$2,400
Total First-Year Deduction	Combined	$50,400

At a 35% marginal tax rate, this generates $17,640 in tax savings the first year. Furthermore, you continue deducting interest in subsequent years. This multi-year benefit compounds your savings significantly.

Section 179 vs Bonus Depreciation

Both Section 179 and bonus depreciation allow immediate expensing of vehicle purchases. However, they work differently. Section 179 has annual limits and phase-outs based on total equipment purchases. Bonus depreciation has no such limits. Additionally, Section 179 cannot create a loss, while bonus depreciation can.

For vehicles over 6,000 pounds gross vehicle weight, Section 179 allows up to $28,900 deduction for 2026. Bonus depreciation then applies to the remaining balance. Lighter vehicles face stricter limitations. Consequently, many business owners prefer heavy SUVs and trucks for maximum tax benefits.

Timing Strategies

Purchase timing significantly impacts tax benefits. Vehicles placed in service by December 31 qualify for full-year depreciation benefits. Therefore, buying in December provides the same first-year deduction as buying in January. However, interest deductions depend on actual payments made.

Consider this scenario. You purchase a vehicle on December 15, 2026. You make one loan payment in December. For 2026, you claim full bonus depreciation but only one month of interest deduction. Nevertheless, the large depreciation deduction typically outweighs the limited interest deduction. Moreover, you preserve most of your $10,000 interest cap for 2027 when interest payments are higher.

Multi-Year Tax Modeling

Smart business owners model deductions across multiple years. Large first-year deductions may create losses that you cannot fully utilize. Alternatively, spreading deductions over several years might keep you in lower tax brackets. Therefore, work with a tax advisory professional to model different scenarios.

The interaction between interest expense limitations and other deductions requires careful analysis. The OBBBA maintained certain interest expense caps for larger businesses. Consequently, high-revenue companies must consider how vehicle interest fits within overall interest expense limitations. However, most small business owners will not encounter these thresholds.

How Do You Claim the Car Loan Interest Deduction?

Claiming the car loan interest deduction requires proper reporting on your tax return. The specific forms depend on your business structure. Sole proprietors use Schedule C. Partnerships use Form 1065. Corporations use Form 1120 or 1120-S. Regardless of entity type, the deduction reduces ordinary business income.

Schedule C Reporting for Sole Proprietors

Sole proprietors and single-member LLCs report car loan interest on Schedule C, Part II. The appropriate line is “Interest (mortgage, paid to banks, etc.).” Enter the business portion of interest paid. Additionally, complete Part IV for vehicle information if claiming other car expenses. This section requires details about the vehicle, including date placed in service, mileage, and business use percentage.

Do not confuse this deduction with the standard mileage rate. You cannot use standard mileage rate and also deduct car loan interest. Instead, you must use actual expense method. Consequently, track all vehicle expenses including gas, maintenance, insurance, registration, and loan interest. Then multiply total expenses by business use percentage.

Entity-Level Deductions

Partnerships, S corporations, and C corporations claim vehicle interest as a business expense. The entity owns the vehicle and makes loan payments. Therefore, the deduction appears on the entity’s tax return. This approach provides cleaner documentation and simpler recordkeeping. Moreover, it removes questions about personal use if the vehicle remains at the business premises.

For S corporations, the deduction flows through to shareholders’ K-1 forms. It reduces qualified business income subject to the 20% QBI deduction. C corporations simply deduct the expense against corporate income. However, C corporations must be mindful of interest expense limitation rules that may apply to larger businesses.

Required Supporting Documentation

Maintain these documents in your tax files:

• Form 1098 or year-end statement from lender showing interest paid
• Loan agreement showing vehicle as collateral
• Vehicle purchase agreement with assembly location
• Window sticker or manufacturer documentation of U.S. assembly
• Complete mileage log for the tax year
• Calculation worksheet showing business use percentage

The IRS may request these documents during an audit. Therefore, retain them for at least three years after filing. Better yet, keep vehicle records for the entire ownership period. This protects you if questions arise about depreciation recapture upon vehicle sale.

What Mistakes Should Business Owners Avoid?

Even experienced business owners make mistakes when claiming vehicle deductions. The car loan interest deduction adds complexity to an already complicated area. Therefore, understanding common pitfalls helps you avoid costly errors and potential audits.

Mixing Standard Mileage and Actual Expenses

You cannot use standard mileage rate and deduct car loan interest. The IRS requires choosing one method or the other. Standard mileage rate for 2026 already includes an allowance for vehicle financing costs. Consequently, claiming both would represent double-dipping. Once you choose actual expense method in the first year of vehicle use, you generally cannot switch to standard mileage later.

Claiming Non-Qualifying Vehicles

Verify assembly location before claiming the deduction. Many popular vehicles are assembled outside the United States. For instance, vehicles assembled in Mexico or Canada do not qualify despite USMCA trade agreements. Similarly, luxury imported vehicles never qualify regardless of their price or features. Therefore, check the Monroney label before assuming eligibility.

Inadequate Mileage Documentation

Poor mileage tracking is the number one reason the IRS disallows vehicle deductions. Reconstructed logs created at tax time lack credibility. Furthermore, the IRS knows that few taxpayers accurately remember trips from months earlier. Therefore, implement a tracking system from day one. Digital mileage apps automatically record trips using GPS data. This contemporary documentation withstands IRS scrutiny better than handwritten logs created retroactively.

Exceeding the $10,000 Cap

Remember that $10,000 is the absolute maximum deduction. This applies even if you have multiple qualifying vehicles. Track your total deductible interest throughout the year. Once you approach $10,000, additional interest provides no tax benefit. Consequently, you might adjust your strategy. For example, make extra principal payments to reduce future interest in years when you have already maxed out the deduction.

Ignoring State Tax Implications

While OBBBA is federal law, state tax treatment varies. Some states automatically conform to federal deductions. Others require separate legislation to adopt federal changes. Therefore, verify your state’s treatment of the car loan interest deduction. You may be able to deduct it federally but not on your state return. Alternatively, some states might allow the deduction even if federal law changes in future years.

How Does This Interact with Other Business Deductions?

Understanding how vehicle deductions interact with other tax provisions is crucial. The OBBBA created a favorable environment by making several business deductions permanent. Consequently, business solutions now include sophisticated multi-year planning strategies. These strategies optimize the timing and combination of various deductions.

Qualified Business Income (QBI) Deduction

The 20% QBI deduction applies to qualified business income from pass-through entities. Car loan interest, like other business expenses, reduces your QBI. However, this is not necessarily negative. Lower QBI means lower income subject to the 20% deduction. Nevertheless, it also means lower overall taxable income. The net effect typically favors claiming all legitimate deductions.

For high-income business owners, QBI limitations based on W-2 wages or asset values may apply. Vehicle depreciation can help you meet the asset test. Therefore, purchasing business vehicles might actually increase your QBI deduction in addition to providing direct expense deductions. This creates a compounding tax benefit.

Self-Employment Tax Considerations

Self-employed individuals pay both the employer and employee portions of Social Security and Medicare taxes. This 15.3% self-employment tax applies to net business income. Vehicle deductions, including car loan interest, reduce net business income. Therefore, they also reduce self-employment tax liability. At the 15.3% rate, every $1,000 in deductions saves $153 in self-employment tax plus your marginal income tax rate.

For example, $10,000 in car loan interest deduction saves $1,530 in self-employment tax. Additionally, it saves income tax based on your bracket. At a 24% marginal rate, that adds $2,400 in income tax savings. Total savings reach $3,930 from a $10,000 deduction. This demonstrates why vehicle deductions are particularly valuable for self-employed business owners.

Interaction with Loss Limitations

Excess business losses face limitations under current tax law. For 2026, losses exceeding certain thresholds cannot offset non-business income. Therefore, large vehicle deductions combined with other business losses might create unusable losses. These losses carry forward to future years. However, immediate utilization is always preferable.

Strategic timing helps avoid this trap. If you expect business losses this year, consider deferring vehicle purchases. Alternatively, elect out of bonus depreciation to spread deductions over multiple years using regular depreciation. This keeps you in positive income territory. Moreover, it prevents triggering alternative minimum tax or other provisions that apply to high deductions relative to income.

Comprehensive Deduction Planning Table

Tax Provision	How It Works	Planning Strategy
Car Loan Interest	Up to $10,000 annual deduction	Time purchases to maximize interest in profitable years
Bonus Depreciation	100% first-year expensing	Combine with interest deduction for maximum benefit
Section 179	Up to $28,900 for vehicles over 6,000 lbs	Use for heavy vehicles with business income limitation
QBI Deduction	20% of qualified business income	Vehicle assets may help meet asset test thresholds

 

 

Uncle Kam in Action: Real Estate Investor Saves $8,200

Maria owns a successful property management company in Seattle. She manages 15 rental properties and drives extensively to inspect units, meet contractors, and handle tenant issues. In early 2026, Maria needed to replace her aging vehicle. After consulting with Uncle Kam, she developed a comprehensive tax strategy.

The Challenge: Maria was considering a used luxury SUV to project professionalism. However, this would not qualify for the new car loan interest deduction. Additionally, she had been using standard mileage rate. Therefore, she was unfamiliar with actual expense method calculations. Maria wanted to maximize tax benefits while getting a reliable vehicle for her growing business.

The Uncle Kam Solution: Our team recommended purchasing a new, U.S.-assembled heavy-duty SUV exceeding 6,000 pounds. Maria financed $55,000 at 5.5% interest. We helped her implement meticulous mileage tracking using GPS-based software. Her business use percentage was 85%, well-documented through property visit records. We structured the purchase through her S corporation for cleaner recordkeeping.

The Tax Savings Breakdown

The Results: Maria’s tax strategy generated substantial savings. She claimed 100% bonus depreciation on the purchase price: $55,000 × 85% = $46,750 first-year deduction. Additionally, her first-year interest payments totaled $2,800. At 85% business use, she deducted $2,380 in car loan interest. Combined, these deductions totaled $49,130.

At Maria’s 35% marginal tax rate, she saved $17,196 in income taxes. Furthermore, the deductions reduced her self-employment tax base. This saved an additional $1,547 in SE tax. Total first-year tax savings reached $18,743. Maria invested $2,500 in Uncle Kam’s tax strategy services. This generated a 7.5x return on investment in year one alone. Moreover, she continues deducting interest in subsequent years, compounding her savings.

Beyond the numbers, Maria gained peace of mind. She has bulletproof documentation for her deductions. Her GPS mileage logs automatically sync with her accounting software. Additionally, Uncle Kam helped her establish systems for tracking all business expenses. Maria now projects she will save over $25,000 in taxes across the life of the vehicle loan.

Next Steps

Taking action on the car loan interest deduction requires planning and proper execution. Here are the concrete steps to maximize this valuable tax benefit:

• Verify vehicle assembly location before purchasing by checking the window sticker or contacting the manufacturer
• Implement a GPS mileage tracking system immediately when placing the vehicle in service
• Consult with Uncle Kam’s tax advisors to model multi-year deduction strategies
• Gather all required documentation including loan agreements, Form 1098, and vehicle purchase records
• Schedule a comprehensive tax planning session to coordinate vehicle deductions with other business strategies

Frequently Asked Questions

Can I deduct interest on car loan for a leased vehicle?

No, the car loan interest deduction applies only to purchased vehicles secured by loans. Lease payments are not considered interest on a loan. However, business lessees can deduct the business portion of lease payments using the actual expense method. This follows traditional vehicle deduction rules that existed before the OBBBA.

Does the $10,000 limit apply per vehicle or per taxpayer?

The limit applies per taxpayer, not per vehicle. If you finance multiple qualifying vehicles, your total deduction cannot exceed $10,000. Married couples filing jointly share one $10,000 limit. However, if you file separately, each spouse has their own $10,000 cap. This applies only to vehicles owned individually by each spouse with separate loans.

What happens if I refinance my car loan during the year?

Refinancing does not affect the deduction as long as the new loan remains secured by the qualifying vehicle. You can deduct interest paid on both the original and refinanced loans. However, if refinancing adds additional funds beyond the original purchase price, only interest on the portion used to buy the vehicle qualifies. Interest on cash-out refinancing for other purposes does not qualify under this provision.

Can I claim this deduction if I use standard mileage rate?

No, you must use the actual expense method to deduct car loan interest. The standard mileage rate already includes an allowance for vehicle costs, including financing. Claiming both would duplicate deductions. Furthermore, once you choose actual expenses for a vehicle, you generally cannot switch to standard mileage in future years. Therefore, this is an important first-year decision.

Are vehicles assembled in Canada or Mexico eligible?

No, only vehicles with final assembly in the United States qualify. Despite USMCA trade agreements, the OBBBA specifically requires U.S. assembly. This means vehicles assembled in Mexico, Canada, or any other country do not qualify. Check the NHTSA database for assembly information if your window sticker is unclear.

How long will the car loan interest deduction remain available?

The OBBBA established this as a temporary provision. Congress has not specified an expiration date. However, lawmakers described it as a short-term economic stimulus measure. Therefore, business owners should assume it may not extend beyond 2026 or 2027. This makes timing vehicle purchases strategically important. Maximize the benefit while it is available rather than assuming long-term continuation.

Can I deduct points or loan origination fees?

Points and origination fees on auto loans are considered prepaid interest. For business vehicles, you can deduct these costs. However, they must be amortized over the loan term rather than deducted immediately. Additionally, they count toward your $10,000 annual cap. Therefore, track these fees separately and include the appropriate annual portion in your interest deduction calculation.

Related Resources

• Comprehensive Tax Strategy Planning for Business Owners
• Entity Structuring Services for Maximum Tax Benefits
• Business Solutions Including Bookkeeping and CFO Services
• Learn About the MERNA Method for Tax Planning
• Comprehensive Tax Guides and Resources

Last updated: February, 2026

This information is current as of 2/12/2026. Tax laws change frequently. Verify updates with the IRS or consult a tax professional if reading this later.