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Deducting auto loan interest on your income-tax return is not typically allowed. But if you’re self-employed and use your car for business, you may be able to write off at least a portion of your interest payment. Of course, any time you’re dealing with taxes and the IRS, it’s important to follow the rules, keep accurate records and be cautious about claiming any deduction. If you’re unsure about whether this particular tax strategy is right for you, you may want to consult with a professional advisor.
Related: Pros & cons of refinancing a car
What Is Auto Loan Interest?
Auto loan interest is what you pay when you borrow money from a lender to finance the purchase of a car, a truck or some other type of vehicle. When you make your payment every month, a portion of the money goes toward paying the interest you owe and the rest goes toward the principal balance. Because auto loans are secured loans—the car is your collateral—the interest rates are typically lower than they are for unsecured loans. Still, over time (the average new car loan is about 70 months), paying interest can make buying your car much more expensive. So, you can’t blame car owners for wondering if and how they could write off those monthly interest charges on their taxes the way they can with a home mortgage or a qualified student loan.
Is Auto Loan Interest Deductible?
Unfortunately, car loan interest isn’t deductible for all taxpayers. Should you use your car for work and you’re an employee, you can’t write off any of the interest you pay on your auto loan. But if you own your business or you’re self-employed, it’s a different story. You can, with some limits, deduct the interest you pay on debts that are directly connected to your business. And that may include the interest on an auto loan if the car is for work, or for work and personal use. Here’s how that breaks down depending on how you use the car.
1. If You Financed a Personal Vehicle
If you’re a freelancer, independent contractor, gig worker or small business owner, chances are you use your car for work at least part of the time. This means that even if you financed the car as a personal vehicle, you still may be able to write off some of the loan interest as a car-related business expense (just as you might deduct other costs, such as gas, tolls and licenses) on Schedule C of your tax return. The amount you can deduct will depend on how you use your car. For example, if your car use was 60% business and 40% personal (based on the total miles you drove in the tax year), you can deduct only 60% of the amount of interest paid.
2. If You Financed a Business Vehicle
If you own a small business or operate as a limited liability company (LLC), you may have financed your car with a business or commercial auto loan, using your business name and making payments with your business bank account. If that’s the case, it’s likely you’re using the car or truck solely for business purposes. (The lender may even require that you document how you’ll use the car.) And that means you can write off 100% of your car interest costs for the year.
How Do You Write Off Car Loan Interest?
There are two ways to deduct car loan interest on your tax return, and there are pros and cons regarding each, depending on how you use your car. If you qualify to use both methods, you may want to run the numbers to determine which might be better for you.
Both methods require tracking your business and personal mileage for the year as well as some car expenses. So, no matter which one you choose, you’ll want to keep complete, clear, and organized records to make things easier when you fill out your tax return, and to use as backup in case the IRS questions the deduction.
Actual Expenses Method
If you choose to use the actual expenses method, you can deduct all eligible car expenses that were directly related to your work in that tax year—including auto loan interest. But remember, you can write off only the portion that was used for business. IRS Publication 463, “Travel, Gift, and Car Expenses,” lists actual car expenses as:
- Depreciation (with limits)
- Licenses and registration fees
- Gas and oil
- Lease payments (with limits)
- Garage rental and parking fees
- Interest (if you are self-employed and use the car for business)
- Personal property taxes
Standard Mileage Rate Method
If you opt for the standard mileage deduction, your main record-keeping focus will be on the number of business miles you drive. To calculate your deduction, you’ll multiply the business miles for the year by the IRS-established standard mileage rate. (That’s 56 cents per mile for 2021.)
If you decide to use the standard mileage rate method, you can’t deduct all of your car’s costs as you would with the actual expense method. Many of those costs—including gas, oil, registration fees, insurance, maintenance and repairs—are already factored into the standard mileage rate.
But you still can deduct the business portion of your car loan interest, as well as business-related parking fees and tolls, and personal property taxes on the vehicle. Taxpayers who choose the standard mileage rate method must use it in the first year the vehicle is available for business use. After that, they can switch back and forth between the standard mileage rate method and the actual expenses method.
Can Auto Loan Interest Be Deducted If It Isn’t a Business Expense?
The IRS lists five types of interest that are deductible on an income tax return.
- Investment interest
- Qualified mortgage interest
- Student loan interest
- Non-farm business interest
- Farm business interest
Unless you’re using a vehicle you financed for non-farm or farm business, you shouldn’t expect to get a tax deduction for the interest you pay on an auto loan. You may have heard that you could use a home equity loan or home equity line of credit (HELOC) to pay for a car and deduct the interest. This is no longer the case. The Tax Cuts and Jobs Act of 2017 suspended until 2026 the deduction for interest paid on home equity loans and lines of credit unless they are used to “buy, build or substantially improve the taxpayer’s home that secures the loan.”
Is There a Tax Benefit to Auto Loan Refinancing?
Refinancing a car loan may be an option worth considering if you’re looking to free up some cash flow for business or personal needs. And though it might not be the primary reason to refinance, as a bonus there could be some tax benefits should you go that route.
Let’s say your pickup is worth $8,000 and you owe just $4,000. If you refinanced for $6,500, you’d still owe less than what the truck is worth, and you’d have $2,500 leftover after you paid off the old loan. You could put that money into your business or use it to tide you over between freelancing jobs. And as long as you’re using the truck for business, you can write off at least a portion of the interest on your taxes each year.
Refinancing also may be a strategy worth exploring if you hope to lower your car payments by qualifying for a lower interest rate, by extending the length of the loan, or, if possible, doing both. Keep in mind, though, that if the length of the loan is extended, you could end up paying more in interest over the long haul—so you’ll want to find the best loan available. It can be helpful to use a comparison site like Lantern to review the refinancing rates and terms lenders are currently offering, then crunch the numbers before deciding to move to a new loan.
You can’t deduct your car payments on your taxes, but if you’re self-employed and you’re financing a car you use for work, all or a portion of the auto loan interest may be tax-deductible. The amount you can deduct will depend on how many miles you drive for business vs. personal use. And you’ll have to track your mileage and keep good records in order to file an accurate tax return. But writing off the loan interest could help cut the cost of using your car for work. So, if you’re financing your car—or thinking about refinancing your auto loan—deducting the interest and other car expenses may be a money-saving strategy worth exploring.
This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice. The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Lantern by SoFi:
This Lantern website is owned by SoFi Lending Corp., a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612; NMLS number 1121636. (www.nmlsconsumeraccess.org)
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All loan terms, including interest rate, and Annual Percentage Rate (APR), and monthly payments shown on this website are from lenders and are estimates based upon the limited information you provided and are for information purposes only. Estimated APR includes all applicable fees as required under the Truth in Lending Act. The actual loan terms you receive, including APR, will depend on the lender you select, their underwriting criteria, and your personal financial factors. The loan terms and rates presented are provided by the lenders and not by SoFi Lending Corp. or Lantern. Please review each lender’s Terms and Conditions for additional details.
Student Loan Refinance:
Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent Repayment or Pay as you Earn (PAYE).
Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 01/31/22. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.
Auto Loan Refinance:
Automobile refinancing loan information presented on this Lantern website is from Caribou. Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including: you must meet the lender’s credit standards, the loan amount must be at least $10,000, and the vehicle is no more than 10 years old with odometer reading of no more than 125,000 miles. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness. Additional terms and conditions may apply and all terms may vary by your state of residence.
Secured Lending Disclosure:
Terms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.
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