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For many business owners and international entrepreneurs expanding into the U.S. market, managing vehicle costs is a significant part of the budget. One question we frequently hear at TheTaxBooks is: “Can I deduct the interest I pay on my car loan?”
The answer has traditionally been a firm “it depends” largely based on whether the vehicle is used for business or personal reasons. However, with the recent enactment of the One, Big, Beautiful Bill (OBBB) Act, the rules for personal use are shifting for tax years 2025 through 2028.
In this guide, we break down how car loan interest deductions work for businesses, expats, and individuals to help you maximize your tax savings while staying compliant with the IRS.
Historically, the IRS has treated car loan interest as “personal interest,” which unlike mortgage interest or student loan interest was generally non-deductible.
However, if you use your vehicle for business purposes, the interest becomes a deductible business expense. The key factor is the percentage of business use. If you use your car 100% for business, you can deduct 100% of the interest. If you use it 60% for business and 40% for personal errands, you can only deduct 60% of the interest.
If you are a business owner or self-employed (reporting income on Schedule C), you generally have two ways to handle vehicle expenses.
To deduct the specific interest paid on your loan, you must use the Actual Expense Method. Under this method, you track everything you spend on the car, including:
You then multiply the total of these costs by your business-use percentage. This method is often preferred for more expensive vehicles or those with high financing costs.
The IRS also offers a simplified Standard Mileage Rate (67 cents per mile for 2024; 70 cents per mile for 2025).
Important Note: If you choose the Standard Mileage Rate, you generally cannot deduct the interest as a separate line item if you are an employee. However, according to IRS Publication 463, if you are self-employed, you can still deduct the business part of your car loan interest even if you use the standard mileage rate. This is a nuanced area where many taxpayers leave money on the table.
The tax landscape changed significantly with the passage of the OBBB Act. For the first time in decades, a deduction is available for personal-use car loans.
Effective for tax years 2025 through 2028, individuals may deduct interest paid on a loan used to purchase a “qualified passenger vehicle” for personal use.
To qualify for this new deduction, several strict requirements must be met:
If you have incorporated a U.S. LLC or Corporation, the way you claim the deduction depends on ownership:
The IRS is particularly strict regarding vehicle deductions. To defend your claim in an audit, you should maintain:
Navigating the intersection of business and personal tax deductions can be complex, especially with new legislation like the OBBB Act. Whether you are a US expat or an international business owner with a U.S. entity, ensuring your vehicle expenses are allocated correctly is vital for both tax efficiency and legal compliance.
At TheTaxBooks, led by Principal Consultant Kishore Chennu (MBA, CMA, EA), we specialize in US Company Formation and comprehensive tax filing. Our team can help you determine which deduction method yields the highest savings and ensure your bookkeeping reflects the necessary records to satisfy the IRS.
To learn more about how you can reduce your taxes and save money, check out the helpful resources on our blog or contact us today to schedule a consultation.
