Drive Your New Car for Work Too? The Final Car Loan Interest Rules Say When the Deduction Still Applies

Treasury and the IRS have finished writing the rules for the new car loan interest deduction, and two kinds of small businesses should read them closely ^[1]. If you’re self-employed and the new car you financed also hauls your tools or your samples, the rules spell out when you can still claim the deduction. If you sell or finance new cars or motorcycles, you’re now on the hook for a new information return, Form 1098-VLI ^[1].

What changed this week

The final regulations, TD 10054, were published in the Federal Register on Sept. 8 and take effect Nov. 9 ^[1]. KPMG reported the release on Sept. 4 and said the final rules largely adopt the version proposed in January ^[2]. That proposal drew 63 public comments and a Feb. 24 hearing with three speakers ^[1].

The deduction itself comes from P.L. 119-21, enacted July 4, 2025 ^[1]. Here’s the short version:

• You can deduct up to $10,000 a year of interest on a loan to buy a qualifying vehicle, per return, whatever your filing status ^[1].
• It shrinks by $200 for each $1,000 of modified adjusted gross income above $100,000, or $200,000 on a joint return ^[1].
• It covers tax years 2025 through 2028, and only loans taken out after Dec. 31, 2024 ^[1].
• You can take it whether or not you itemize ^[1].

The vehicle has to be new (its original use starts with you), assembled in the United States, rated under 14,000 pounds gross vehicle weight, and secured by a first lien ^[1]. Used cars don’t count, and neither does a purchase on a credit card, which generally isn’t secured debt ^[1].

How we got here, and the part lenders are pushing back on

When the law passed, lenders had no form and no rules. In Notice 2025-57, issued in October 2025, the IRS said lenders could meet their 2025 duty just by making the year’s interest total available to each borrower ^[1]. Commenters asked for more of that. The final rules say no: lenders “will have had approximately 18 months from the enactment of the OBBBA to the time that they will need to begin reporting,” and borrowers need the numbers to file ^[1]. The agencies also considered a delay for small businesses and rejected it, because borrowers would lose the information ^[1].

The other sore spot is negative equity, meaning the leftover balance on a trade-in that gets rolled into the new loan. The rules exclude it. Treasury and the IRS say that debt relates to the earlier vehicle, not the purchase of the new one, and counting it would let people deduct interest on pre-2025 loans ^[1]. So a loan that’s partly negative equity has to be split pro rata, and only the vehicle share of the interest qualifies ^[1]. Service plans, extended warranties, sales tax and similar items customarily financed with the car do count ^[1].

The American Financial Services Association, which represents vehicle finance companies, sees it differently. In a Sept. 9 post, the group argued that a car finance contract is a single whole that consumers and lenders can’t practically pull apart by component, and that leaving out negative equity cuts the value of the deduction and runs against what Congress intended ^[3]. It said it shared its members’ questions with Treasury and the IRS during drafting and is now consulting other trade associations and counsel about possible responses ^[3].

Does this apply to you?

If you drive the vehicle for work. The test is about what you expected when you signed. You qualify if, at the time of the loan, you expected the vehicle to be used for personal purposes by you, your spouse or certain relatives more than 50% of the time ^[1]. It’s a one-time call: “differences between expected use at the time the indebtedness is incurred and later actual use of the vehicle do not affect the personal use determination,” the agencies wrote ^[1].

Commenters worried about splitting interest between personal and business use. The final rules make that optional. Interest that qualifies both as car loan interest and as business interest can be deducted either way, just not twice ^[1].

A hypothetical freelance photographer finances a new U.S.-assembled SUV, expecting 60% personal use. This year she pays $3,500 in interest and drives 45% for business. Using the agencies’ own example, she could deduct all $3,500 as car loan interest, or take $1,575 as business interest and $1,925 as car loan interest ^[1]. Which works better depends on her income and the phase-out, and that’s a fair question for a preparer ^[1].

The data suggest this matters. The IRS counted 5 million vehicles that electronically filing sole proprietors placed in business service in tax year 2023 ^[1]. About 80% were also available for personal use, and among those, roughly 40% were driven mostly for personal miles ^[1]. The agencies note that count includes used, leased and foreign-assembled vehicles that won’t qualify ^[1].

If the vehicle is titled to your business. No deduction. Business entities can’t meet the personal-use requirement, so only individuals, decedents’ estates and non-grantor trusts can claim it ^[1].

A hypothetical motorcycle dealership carries its own installment contracts on new bikes. For each loan where it receives $600 or more of interest in a year, it must file a Form 1098-VLI and give the borrower a copy ^[1]. The return has to show the VIN, year, make and model, the loan’s start date and opening principal, and the interest ^[1]. The dealer also has to decide whether the bike qualifies, including where final assembly happened and whether the loan was for personal use ^[1]. If the sales contract shows personal use, the dealer may rely on it absent conflicting information; otherwise it can get that information from the borrower ^[1].

The rules also settle a dealer question. A demonstrator held for sale doesn’t use up the “original use,” so a customer can still buy it as new; a loaner used to run the business generally does ^[1].

What to do now

The IRS expects about 36,000 businesses to file these returns: 17,800 new car dealers, 4,100 motorcycle dealers, 5,800 car loan lenders and 8,100 consumer lenders ^[1]. It counts about 24,600 of them as small and estimates 8 million returns a year at a quarter hour each ^[1]. Used car dealers aren’t on the list, because the law covers only new vehicles ^[1].

My view, as analysis: the 2,000,000-hour burden estimate wasn’t raised after comments, because commenters didn’t put a number on their costs, the agencies said ^[1]. For a single-store dealer without a compliance department, determining assembly location and personal use loan by loan is real work, and the agencies said plainly that “the statutory language does not authorize or support separate information reporting requirements for small entities” ^[1].

Statements to borrowers are due by January 31 of the following year, and returns to the IRS by February 28, or March 31 if filed electronically ^[1]. If you file 10 or more information returns of any type, the electronic filing rule applies, the same aggregate count I covered in the column on the IRS’s 1099 e-file system ^[1]. Relief for honest mistakes rests on the general reasonable-cause standard; the agencies declined to add safe harbors ^[1].

What I’m keeping an eye on

Nov. 9. The final rules take effect ^[1]. Watch for the final Form 1098-VLI instructions, which will carry the details lenders need for 2026 statements.

The negative equity fight. The finance companies’ trade group says it’s weighing its options ^[3]. Whether that turns into a request to Treasury, a push in Congress or nothing at all is still open.

— Sally