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Car loan interest is only tax deductible if you're a business owner or self-employed. Unfortunately, employees can't claim this deduction, even if they use their car for work purposes. Let's break down how the car loan interest tax deduction works and who qualifies.
Who Can Deduct Car Loan Interest on Their Taxes?
You can deduct car loan interest if you're a business owner or self-employed and use your car for business purposes. The deduction applies to a portion of the interest based on your business use. For example, if you use the car 40% of the time for your business, you can deduct 40% of the car loan interest paid. If the car is used 100% for business, you can deduct all of the interest paid.
Interest paid on a car used solely for personal reasons—like commuting to work or running errands—isn't tax deductible. Additionally, you aren't allowed to deduct car loan interest if you're an employee, even if you use the car for business-related purposes. That said, you may be eligible for the standard mileage rate deduction on business miles that aren't reimbursed by your employer.
Learn more >> Tax Deductions for Self-Employed Taxpayers
How to Claim Car Loan Interest on Your Taxes
1. Gather Documents
Detailed records are essential to verify your interest payments and other deductible car expenses (more on that below).
You may need:
- A mileage log
- Car loan statements listing interest paid
- Receipts for maintenance, repairs, parking, tolls and other relevant expenses
2. Determine Eligibility
Before you claim car loan interest on your taxes, make sure you're eligible. If you're self-employed or a business owner and use your car for business, you can deduct interest related to its business use.
3. Calculate Business Miles Driven
Keep detailed records of the car's business versus personal use—only the portion of interest related to business use is deductible. For instance, use a mileage log to record each business trip, including:
- Date of the trip
- Destination
- Business purpose
- Beginning and ending odometer readings
- Miles driven for the trip
- Other expenses incurred (such as parking or tolls)
At the end of the year, calculate the percentage of miles driven for business relative to total miles. This percentage will determine how much of your car loan interest is deductible.
4. Choose Your Deduction Method
In addition to car loan interest, you can deduct other vehicle expenses using one of two methods:
- Standard mileage rate: You can deduct a set rate per mile driven for business purposes—67 cents per mile in 2024. Additionally, you can deduct business-related parking fees and tolls, except parking fees paid to park where you work.
- Actual expense method: This method allows you to deduct the portion of your actual car expenses that apply to business use. Deductible expenses include:
- Depreciation
- Licenses
- Gas
- Oil
- Tolls
- Lease payments
- Insurance
- Garage rent
- Registration fees
- Repairs
- Tires
Keep a log and receipts for all your car expenses throughout the year. At the end of the year, you'll divide the expenses between business and personal use based on your mileage log.
5. Calculate the Deduction Amount
If you're using the actual expense method, calculate the total interest paid on your car loan for the year. Your lender may provide an annual statement summarizing the interest paid, or you can use your monthly statements.
Multiply the total interest paid by the percentage of business use. For example, if you paid $1,000 in interest and 40% of your car's use was for business, you can deduct $400.
You will report the deductible portion of car loan interest, along with other business expenses, on Schedule C (Form 1040).
How to Save Money on a Car Loan
There are several ways to save money on a car loan. Here are steps you can take:
- Improve your credit score. Your credit score has a direct impact on your loan rate. Improving your credit score before applying for a car loan can help you qualify for a lower interest rate and save you hundreds or thousands of dollars in interest.
- Compare loans from different lenders. Shop around and compare car loans from banks, credit unions, online lenders and dealerships. Getting preapproved can help you learn what rates you qualify for and land the best deal.
- Make a bigger down payment. A larger down payment reduces the amount you need to borrow. A smaller loan means you'll pay less interest over the life of the loan.
- Opt for a shorter loan term. While the monthly payment may be higher with a shorter loan term, having one reduces the total amount of interest paid. Plus, shorter loan terms may also come with lower interest rates.
- Make extra payments. By making additional payments on your loan, you can reduce the loan balance quicker, decreasing the amount of interest charged over time. Make sure your lender applies extra payments toward the principal and check for prepayment penalties.
- Decline unnecessary dealer add-ons. Dealership add-ons such as extended warranties, service contracts and tire protection can increase your loan amount, and thus the interest paid. Consider buying these add-ons separately or declining them rather than adding them to your loan amount.
- Refinance your loan. If interest rates drop or your credit score improves after you've taken out the loan, refinancing your car loan may help you secure a lower interest rate. Refinancing may also allow you to adjust the loan term to reduce overall interest.
The Bottom Line
Car loan interest deductions are available to business owners and other self-employed people who use their vehicles for business. If you're eligible, maintain detailed records and calculate business versus personal to help you claim the deduction. Consult a tax professional if you're not sure you qualify or need help calculating the amount you can claim.