How much interest on your car loan is tax deductible?
Owning a car that you use part of the time or all the time for your business can give you tax benefits. Perhaps the most well-known benefit is the standard mileage deduction, which is a rate set by the IRS that small business owners and self-employed people can use to offset some of the costs associated with operating a vehicle. for professional purposes.
But that’s not the only write-off available to those who own a car for business purposes. If you have an auto loan for the vehicle, you can also deduct the interest when filing your federal tax returns.
When can you deduct car loan interest from your taxes?
Only self-employed people or owners of their own business who use a vehicle for business purposes can claim a tax deduction for interest on car loans. If you are an employee of someone else’s business, you are not eligible for this deduction. Also, interest paid on a loan used to purchase a car solely for personal use is not deductible.
If the vehicle in question is used for both business and personal purposes, claiming this tax deduction is slightly more complicated. You need to determine the percentage of time the vehicle is driven for business versus personal needs and apply that calculation to the loan interest deduction claimed on your tax returns.
For example, if you use the vehicle 50% of the time for business purposes, you can only deduct 50% of the loan interest on your tax returns. This means that if you pay $1,000 annually in interest on your car loan, you can only claim a $500 deduction.
If, on the other hand, the car is used entirely for business purposes, the full amount of interest may be waived.
Documents to keep
When claiming deductions of any kind on your tax returns, it is best to keep detailed records and supporting documents that can be used to verify all expenses in case of questions. Some of the documents to keep when claiming auto loan interest deduction on your tax return include:
- A log or record of all trips made in the vehicle for business purposes, including an odometer mileage log.
- Auto loan payment records verifying interest paid.
- Although you cannot deduct parking or tolls as part of the car loan interest deduction, you can also keep these types of receipts, if they help support your claim that the vehicle was used at commercial purposes.
Keeping these records can be useful if you are audited. It’s a good idea to keep supporting documents for at least three years from the date the tax return is filed.
If you are unsure, hire a professional
If you are unsure whether you qualify for the auto loan interest deduction or how to correctly calculate the exact amount of deduction to claim on your tax return, it is best to seek professional advice.
A tax expert can walk you through the process and determine if the deduction makes sense for your particular situation. In cases where you use the vehicle for business and personal purposes, for example, it may not be wise to claim the interest deduction on the car loan if the use of the vehicle for business purposes is minimal. Claiming the deduction may take more effort than it’s worth if you use the vehicle for business less than 50% of the time.
At the end of the line
If you’re a small business owner or self-employed, deducting car loan interest on your tax returns can be a worthwhile deduction. But before claiming this deduction, make sure you qualify and work with a tax professional if you’re unsure how to calculate the exact amount you might be eligible for.