Key insights
- Proposed IRS regulations turn the auto loan interest deduction into a tightly structured system with defined vehicle and loan requirements.
- Eligibility depends on accurate origination stage documentation, including vehicle details, loan terms, and proper lien treatment.
- The new reporting framework gives the IRS highly detailed visibility into auto loan data, increasing compliance pressure on lenders and dealers.
- Auto lenders should begin evaluating their vehicle loan processes now to confirm they can meet the new compliance and reporting standards.
Get help with the new auto loan interest deduction.
A new federal tax deduction allows many consumers to deduct interest paid on qualifying auto loans.
While the law was initially described as a straightforward benefit, recently released IRS and U.S. Treasury regulations reveal the rules are far more technical and place substantial new responsibilities on both taxpayers and auto‑finance businesses.
Explore what consumers, lenders, and dealerships should know now so they can prepare for these changes.
A new deduction with detailed compliance requirements
Under the proposed regulations, an auto loan qualifies for deductible interest only if several criteria are met. These include:
- Vehicle eligibility,
- Proper loan structure,
- First‑lien security, and
- Correct reporting of the vehicle’s VIN on the tax return.
Missing the VIN disqualifies the deduction entirely.
Although the deduction applies for tax years 2025 through 2028 for loans originated after December 31, 2024, businesses may rely on these rules now — meaning lenders and dealerships originating loans in 2025 and 2026 should operate as though the regulations are already in effect.
New reporting requirements for lenders and dealers
A major component of the regulations is a new annual reporting requirement under §6050AA, similar to the mortgage interest reporting system. Finance companies, banks, captive lenders, certain dealers, and loan servicers must file an information return for each qualifying loan when they receive at least $600 of interest in a year.
Required data includes:
- Borrower name, address, and TIN
- Vehicle year, make, model, and VIN
- Principal balance on January 1
- Loan origination date
- Assignment date if the loan was purchased
Lenders must also send borrowers a written annual statement by January 31.
For most auto‑finance operations, capturing and reporting this level of data is new and will likely require system updates.
Which vehicles qualify for the auto loan interest deduction
To qualify for the deduction, a vehicle must:
- Weigh under 14,000 pounds
- Be designed for public‑road use
- Be newly placed in service by the taxpayer (not a dealer)
- Have final assembly in the U.S.
Demo vehicles may create issues in states where dealers must title them, because that may start “original use.” Vehicles returned within 30 days can reset this status. Lease‑to‑own models often don’t qualify because original use begins with the lessor.
What counts as a qualifying loan
A Specified Passenger Vehicle Loan qualifies only if it finances the purchase of the vehicle and certain related costs, such as sales tax, registration fees, extended warranties, and service plans. It doesn’t include:
- Negative equity (unless partially offset by a down payment)
- Cash‑out amounts
- Insurance
- Non‑vehicle personal property
Loans with mixed components must be allocated between qualifying and non-qualifying portions. Refinancing retains eligibility only for the remaining principal of the original qualifying loan.
The personal‑use requirement for the auto loan interest deduction
At loan origination, the buyer must reasonably expect the vehicle will be used more than 50% for personal purposes. This is a one‑time test; there is no annual reconsideration.
Choosing between this deduction and business interest
If interest could also be deducted as a business expense, taxpayers must choose one category. The same interest can’t be deducted twice. Allocating interest to business use may be more advantageous for taxpayers near income‑based phaseouts.
What auto‑finance businesses need to do now
The new reporting system requires meaningful operational changes. Lenders, servicers, and dealerships offering financing should begin preparing to:
- Update systems to capture VINs, vehicle details, and principal balances
- Verify loan structures are accurately classified as qualifying or non-qualifying
- Establish processes for designating a principal borrower when multiple names are listed
- Incorporate the mandated language into borrower statements
- Adjust payment‑application rules to comply with IRS accrual‑period guidance
Because penalties apply for inaccurate or incomplete filings, early preparation is critical.
Why this matters for consumers
The new auto loan interest deduction provides a valuable benefit for many taxpayers, but the rules are intricate and highly dependent on proper documentation and reporting.
To claim the deduction, taxpayers will need accurate documentation, including the VIN and proof that their vehicle and loan qualify. The IRS’s new data collection from lenders will make ineligible vehicles, loan structures, and loan terms easy to identify.
How CLA can help with the new auto loan interest deduction
For lenders and dealerships, the reporting obligations represent one of the most significant operational shifts in auto‑finance compliance in years. Preparing systems, processes, and loan documentation now can help businesses and consumers take advantage of the deduction while avoiding potential penalties.
CLA can interpret the operational impact of the proposed regulations, assess and redesign origination workflows, and confirm vehicle and loan eligibility at the outset. For lenders and dealers, CLA can help prepare you to meet the new reporting and data‑collection requirements through process reviews, system changes, and practical advisory support.