2026 Vehicle Loan Interest Deduction: Personal and Business Rules

Vehicle interest now has two distinct federal paths. A documented business-use share may be deductible under the trade-or-business rules, and a temporary 2025–2028 deduction may apply to interest on certain loans for qualifying personal-use passenger vehicles. The two paths have different eligibility, allocation, and record requirements.

Temporary Personal Vehicle Loan Interest Deduction

For 2025 through 2028, an individual may deduct up to $10,000 of qualifying interest on debt incurred after December 31, 2024 to purchase a new passenger vehicle for personal use when:

• The vehicle's final assembly occurs in the United States.

• The loan is secured by a first lien on the vehicle.

• The taxpayer reports the vehicle identification number and retains lender and purchase records.

• The vehicle and debt otherwise meet the statutory definitions; leases and used-vehicle purchases do not qualify.

The deduction phases out when modified AGI exceeds $100,000, or $200,000 for married couples filing jointly. It is available to eligible taxpayers whether or not they itemize, but business-use interest must be allocated under the business rules rather than deducted twice.

The §163(h) Personal Interest Disallowance

Section 163(h) generally disallows the deduction of personal interest. The categories of interest that ARE deductible:

• Qualified residence interest (mortgage interest on primary or secondary home).

• Investment interest (against investment income, subject to limitations).

• Trade or business interest.

• Student loan interest (above-the-line, subject to phase-outs).

• Passive activity interest (subject to passive activity rules).

• Estate tax interest in certain situations.

Outside the temporary qualified passenger-vehicle deduction, personal car-loan interest, credit-card interest on personal expenses, and other personal-use financing costs are generally nondeductible.

Business Use Vehicle Loan Interest

For vehicles used in a trade or business, the loan interest may be deductible to the extent of business use percentage. The mechanics depend on the entity type and the deduction method elected.

Self-Employed (Schedule C / Single-Member LLC)

For sole proprietors, vehicle loan interest is deductible based on:

• Business-use percentage — calculated from a contemporaneous mileage log showing business vs total miles.

• Method of vehicle expense reporting:

- Standard mileage method: Vehicle loan interest is separately deductible (in addition to the per-mile rate) for self-employed taxpayers. Reported on Schedule C as a separate expense.

- Actual expense method: Loan interest is included in total vehicle expenses, allocated by business-use percentage.

For a self-employed taxpayer with a $500 monthly car payment ($200 of which is interest) and 70% business use:

• Annual interest: $2,400

• Deductible business portion: $1,680 (70% × $2,400)

S-Corporation Owners

S-corp owners face different rules depending on vehicle ownership:

• If the S-corp owns the vehicle and pays the loan: All interest is deductible by the S-corp as a business expense, with the personal use portion creating taxable fringe benefit income to the owner-employee.

• If the owner personally owns the vehicle and uses it for business: The S-corp can establish an accountable plan to reimburse the owner for business-related vehicle expenses. The interest portion is reimbursable based on business-use percentage.

Employees

Unreimbursed employee business expenses generally remain nondeductible after 2025 under current law. An employer accountable plan may reimburse properly substantiated business vehicle expenses without treating a qualifying reimbursement as wages; employees should not claim the same expense again.

Documentation Requirements

Section 274(d) imposes strict substantiation requirements for vehicle expenses, including:

• Date of each business trip.

• Destination and starting point.

• Business purpose.

• Total miles driven (business and personal separately).

For loan interest specifically, additional documentation needs:

• Loan amortization schedule showing interest portion of each payment.

• Bank or lender statements documenting interest paid.

• Business-use percentage calculation supporting the allocation.

Mileage Log Best Practices

The IRS requires contemporaneous records — meaning logs maintained at the time of each trip, not reconstructed at year-end. Mobile apps (MileIQ, Everlance, QuickBooks Self-Employed) automate this with GPS tracking.

Estimated business-use percentages without supporting records are routinely disallowed in audit. The Cohan rule (which permits reasonable estimates for some categories of business expense) does NOT apply to vehicle expenses under §274(d).

The Listed Property Connection

Passenger automobiles and other transportation property generally remain listed property under §280F. Taxpayers claiming vehicle deductions must substantiate business use, mileage, dates, destination, and business purpose under the heightened recordkeeping rules; mixed use must be allocated between deductible business use and nondeductible personal use.

Vehicle Loans for Business Equipment

For a commercial vehicle used exclusively in a trade or business, loan interest and ordinary operating costs generally do not require a personal-use allocation. Deduction timing and amount can still be affected by substantiation, depreciation and capitalization rules, vehicle limits, business-interest limitations, and other applicable provisions.

RV and Boat Loan Interest

RVs and boats present unique considerations:

• RV used as a second home: If the RV has sleeping, cooking, and toilet facilities, it may qualify as a second home for §163(h) qualified residence interest deduction. The taxpayer can deduct mortgage interest on up to $750,000 of acquisition debt (combined with primary home).

• Boat used as a second home: Same rule applies. A boat with sleeping, cooking, and toilet facilities can qualify for residence interest treatment.

• RV/boat used in business: The business-use portion of interest may be deductible under business expense rules.

• Pure recreational use: Interest is nondeductible personal interest.

Lease vs Loan Interest Treatment

For business vehicles, leases produce different tax outcomes than loans:

• Loan-financed purchase: Interest is deductible (business portion); principal payments are not. Vehicle is depreciable.

• Lease: The substantiated business-use portion of lease payments may generally be deductible, subject to lease-inclusion amounts and other limitations; the lessee generally does not claim depreciation on a vehicle it does not own.

The economic and tax outcomes of lease vs buy depend on the vehicle, holding period, mileage usage, and overall tax position.

Home Equity Loan to Buy a Vehicle

Under TCJA (through 2025), home equity loan interest is deductible only if the loan is used to acquire or substantially improve the home securing the loan. Using a home equity loan to buy a car triggers the personal interest disallowance — the home equity interest becomes nondeductible to the extent the proceeds were used for personal vehicle purchase.

Current law did not restore a general deduction for home-equity debt used to buy a personal vehicle. Interest tracing and the qualified-residence rules still control.

Common Mistakes

• Claiming personal car-loan interest without testing the temporary 2025–2028 vehicle, debt, final-assembly, VIN, and income requirements.

• Failing to maintain contemporaneous mileage logs supporting business-use percentage.

• Including loan interest in the standard mileage rate (it's separately deductible for self-employed taxpayers).

• Failing to allocate based on actual business use rather than estimates.

• Missing the second-home interest deduction for RVs and boats with appropriate facilities.

• Using home equity loans to buy vehicles without recognizing the post-TCJA interest disallowance.

• For S-corp owners, failing to set up an accountable plan for personally-owned business vehicle reimbursements.

Bottom Line

Vehicle loan interest can follow either of two federal paths: the temporary 2025–2028 deduction for interest on a qualifying personal-use passenger-vehicle loan, or a trade-or-business deduction based on documented business use. Personal use does not create a business deduction, but qualifying personal-use loan interest may still be deductible under the temporary rules described above. Business owners should document mileage and allocation carefully, avoid double deductions, and use an accountable plan where appropriate for an S-corporation owner-employee.