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In most cases, your car loan interest is not tax deductible. The only exception to this rule is if your car is used for business purposes, in which case you will qualify for a car loan tax deduction.
If you do use your vehicle for business, a car loan tax deduction isn’t the only way you’ll save. In this brief guide we’ll go over some of the other tax deductions you may be eligible for and show you how the comparison shopping and broker app Jerry can save you even more money month after month.
Car loan deductions for businesses
As a rule, there are no tax deductions for car loans or car loan interest. But if your car is used for business, you might qualify for a car loan tax deduction plus some other deductions.
That said, there are a couple of important caveats:
- Employees do not qualify for car loan tax deductions—even if the car is only used for work and nothing else
- Your commute doesn’t count for a car loan tax deduction, though driving to a business meeting or client’s office does
Standard mileage rate
This is the default cost-per-mile the IRS allows you to deduct when using your personal vehicle for business purposes. This rate changes year after year. For 2021, it’s 56 cents per mile.
You’re not allowed to deduct the actual costs of the car if using the standard mileage rate. It calculates those costs already based on national averages. But there are three expenses you’re still allowed to claim because they’re not factored into the IRS’s standard mileage rate:
- Car loan interest—not the payments, just the interest
- Personal property tax on the purchase of the vehicle
- Tolls and parking fees from business trips.
Alternatively, you can choose deductions for actual vehicle expenses, but this is a lot trickier and tends to lead to errors. Speak with a professional tax expert before deciding to go this route.
What if my car is for personal use as well?
This is where things get a little tricky. If you also use your business car for personal use, you’ll need to estimate how often you’re using the car for personal and business uses as accurately as possible.
Here’s an example:
- 50% of your car’s use is for business and 50% is personal
- You paid $25,000 for the car and you have a 10 percent interest rate, which gives you $2,500 in loan interest
- If you’re claiming 50 percent business use for taxes, your deduction would be $1,250—that is, 50% of the loan interest amount
Again, you’ll want to consult a tax professional to make sure you’re maximizing your deductions without making critical tax filing errors. You’ll also want to make sure you’re estimating the use of your car as accurately as possible.
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Are car loans tax deductible?
No, car loan payments are not tax deductible.
What about interest? Is car loan interest tax deductible?
The interest on car loan payments is deductible only if you use the car for business—and only if it qualifies. Be careful when claiming car loan interest as doing this incorrectly can result in an audit.
What cars qualify for a car loan tax deduction?
Car loans are only tax deductible if you list your vehicle as an itemized business expense and if your vehicle falls under one of these categories recognized by the IRS as legitimate:
Qualified mortgage interest
Student loan interest
Non-farm business interest
Farm business interest
Your vehicle may be eligible for a car loan tax deduction if you purchased it using a home equity line of credit. But again, be mindful of mistakes and consult with a tax expert for assistance if you aren’t absolutely sure.