Proposed Regs for Car Loan Interest Deduction
On December 31, 2025, the Treasury Department issued proposed regulations (REG-113515-25) for the new deduction for car loan interest.
The new deduction for car loan interest is discussed on pages 35 to 38 of the Tax Year 2025 M+O=CPE Individual Tax Reference Book.
The proposed regulations do not contain many surprises, and they provide detailed definitions and explanations, along with guidance for the reporting requirements that will apply in 2026 and later tax years for lenders who receive car loan interest as part of their trades or businesses.
Here are a few notable items from the proposed regulations.
The proposed regulations clarify that the $10,000 limit on the deduction applies per return, regardless of filing status, and the proposed regulations indicate that married individuals filing separate returns can each deduct up to $10,000 of otherwise qualified car loan interest.
The proposed regulations clarify that deductible interest includes only interest on loans used to purchase an otherwise qualified vehicle. It does not include any payments in connection with a leased vehicle, even if the lease agreement uses the term “interest” for some portion of the payments required under the lease.
Lastly, the proposed regulations address mixed-used vehicles, where the vehicle is used for both personal and business use.
The proposed regulations confirm that the portion of car loan interest attributable to the business use of a vehicle remains deductible as in the past, and such interest is not subject to the $10,000 limit that applies to the new deduction for interest on loans for personal-use vehicles.
However, the proposed regulations indicate that the new deduction for interest on loans for personal-use vehicles is available only if the buyer of the vehicle intends to use the vehicle for more than 50% personal use at the time the vehicle is purchased.
As a result, if a buyer purchases a vehicle with the intention of using the vehicle for less than 50% personal use and more than 50% business use, the proposed regulations indicate that the buyer will not be eligible for the new deduction for the personal-use portion of the interest on the vehicle loan.
For example, if a buyer purchases a vehicle in 2025 with the intention of using it 90% for business purposes and 10% for personal purposes, the buyer will be able to deduct the 90% business-use portion of the interest on the vehicle loan, as was the case in prior years. However, the buyer will apparently not be able to use the new deduction for car loan interest to deduct the 10% personal-use portion, since the buyer did not purchase the vehicle with the intention of using it for more than 50% personal use.
In practice, it may be difficult to determine and document a buyer’s intended use of the vehicle at the time of purchase. In addition, the preamble to the proposed regulations indicate that a taxpayer’s eligibility for the new deduction will not be affected by differences between the actual amount that the vehicle is used for personal purposes versus the amount of expected personal use at the time of purchase.
While the proposed regulations apparently allow a buyer to later change his or her mind about how much the vehicle will be used for business and personal use, it would be difficult to prove that the buyer intended to use the vehicle for more than 50% personal use at the time of purchase, especially if the vehicle ends up actually being used mostly for business purposes.
As a result, practitioners should advise their clients that using the new vehicle loan interest deduction for vehicles that are used mostly for business purposes could cause IRS scrutiny, even if a client originally intended to use the vehicle for personal purpose more than 50% of the time when the vehicle was purchased.
Are you registered for one of our upcoming seminars in January? If you have not yet attended and are not already registered, register here so you’ll be fully prepared with what you need to know, including the major new federal tax law enacted on July 4th.