Is car loan interest tax deductible?
Key takeaways
- Tax write-offs are available if you use your car for business all or some of the time.
- Only self-employed individuals are eligible for a tax deduction.
- You will need to keep detailed records to prove your business use when you file your taxes.
- Car loan interest is deductible in certain situations where you use your vehicle for business purposes.
Owning a car that you use some or all of the time for your business can provide tax benefits. Perhaps the most well-known benefit is the standard mileage deduction, a rate set by the IRS that small business owners and those who are self-employed can use to write off some of the costs associated with operating a vehicle for business purposes.
But that’s not the only write-off available to those who own a car for business needs. If you have a car loan for the vehicle, you may also be able to deduct the interest when filing your federal tax returns.
When can you deduct car loan interest from your taxes?
Only those who are self-employed or own a business and use a vehicle for business purposes may claim a tax deduction for car loan interest. If you are an employee of someone else’s business, you cannot claim this deduction. In addition, interest paid on a loan used to purchase a car solely for personal use is not deductible.
If the vehicle in question is used for both business and personal needs, claiming this tax deduction is slightly more complicated. You must determine the percentage of time the vehicle is driven for business needs versus personal needs and apply that calculation to the loan interest deduction being claimed on your tax returns.
For instance, if you use the vehicle 50 percent of the time for business reasons, you can only deduct 50 percent of the loan interest on your tax returns. If you pay $1,000 in interest on your car loan annually, this means you can only claim a $500 deduction.
On the other hand, if the car is used entirely for business purposes, the full amount of interest can be written off.
What documentation do you need to claim car loan interest tax deductions?
When claiming deductions of any kind on your tax returns, it’s best to keep detailed records and supporting documentation. You need to be able to verify all expenses in case there are any questions or an audit.
- A log or record of all trips taken in the vehicle for business purposes, including a log of the odometer mileage.
- Car loan payment records verifying the interest paid.
- Vehicle maintenance and visits to the mechanic.
- Receipts for tolls and parking fees.
Although you cannot write off parking or tolls as part of the auto loan interest deduction, they are legitimate car expenses that can be deducted when used for business. It will also help support your claim that the vehicle was used for business purposes.
Keep supporting documentation for at least three years from the date you file the tax return.
How to write off car loan interest
You can opt for the standard deduction mileage rate deduction or the actual vehicle expense deduction. The better option will depend on how frequently you use your vehicle for business. If your total vehicle expenses for business — including interest — are more than the standard mileage deduction, then it may be worth a line-by-line approach.
However, the approach you take will depend on how you previously filed taxes. In order to submit actual expenses, you will need to do this every year. Talk to a tax professional if you haven’t filed as a business before. They will be able to guide you on the best way to file for the entire length of your loan or lease.
Like other business expenses, listing your expenses will be done in Form 1040 Schedule C. The IRS provides instructions on what other information you may need to submit, as well as how to calculate your deductions.
If you’re unsure, hire a professional
It’s best to consult a professional if:
- You’re uncertain about whether you qualify for the car loan interest deduction
- You’re unsure about how to properly calculate the exact amount of the deduction to be claimed on your tax filing
A tax expert can help guide you through the process and determine whether the deduction makes sense for your unique circumstances.
For instance, when you use the vehicle for business and personal uses, it may not make sense to claim the auto loan interest deduction if business-related use of the vehicle is minimal.
Claiming this deduction may be more effort than it is worth if you use the vehicle for business purposes less than 50 percent of the time.
The bottom line
Deducting car loan interest on your tax returns can be a valuable write-off if you’re a small business owner or you’re self-employed. But before you claim this deduction, be sure you qualify. Work with a tax professional if you’re uncertain about how to calculate the exact amount you may be eligible to claim.
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