How Much Of Your Car Loan Interest Is Tax Deductible?
Owning a car that you use some, or all of the time, for your business can provide 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 those who are self-employed can use to write off some of the costs associated with operating a vehicle for business purposes.
But that’s not the only write-off available to those who own a car for business needs. If you have a car loan for the vehicle, you may also be able to deduct the interest when filing your federal tax returns.
When you can deduct car loan interest from your taxes
Only those who are self-employed or own their own business and use a vehicle for business purposes may claim a tax deduction for car loan interest. If you are an employee of someone else’s business, you are not eligible to claim this deduction. In addition, interest paid on a loan that’s used to purchase a car solely for personal use is not deductible.
If the vehicle in question is used for both business and personal needs, claiming this tax deduction is slightly more complicated. You must determine the percentage of time the vehicle is driven for business needs versus personal needs and apply that calculation to the loan interest deduction being claimed on your tax returns.
For instance, if you use the vehicle 50 percent of the time for business reasons, you can only deduct 50 percent of the loan interest on your tax returns. This means that if you pay $1,000 in interest on your car loan annually, you can only claim a $500 deduction.
If, on the other hand, the car is used entirely for business purposes, then the full amount of interest can be written off.
Documentation to keep
When claiming deductions of any kind on your tax returns it’s best to keep detailed records and supporting documentation that can be used to verify all expenses should questions ever arise. Some of the records to maintain when claiming the auto loan interest deduction on your tax return include:
- A log or record of all trips taken in the vehicle for business purposes including a log of the odometer mileage.
- Car loan payment records verifying the interest paid.
- Though you cannot write off parking or tolls as part of the auto loan interest deduction, you may also want to keep these types of receipts, if they help support your claim that the vehicle was used for business purposes.
Retaining these records can help if you are audited. It is a good idea to keep supporting documentation for at least three years from the date you file the tax return.
If you’re unsure, hire a professional
If you’re uncertain about whether you qualify for the car loan interest deduction, or you’re unsure about how to properly calculate the exact amount of the deduction to be claimed on your tax filing, it is best to consult a professional.
A tax expert can help guide you through the process and determine whether the deduction makes sense for your unique circumstances. In cases when you use the vehicle for business and personal uses, for instance, it may not make sense to claim the auto loan interest deduction if business-related use of the vehicle is minimal. Claiming the deduction may be more effort than it is worth if you use the vehicle for business purposes less than 50 percent of the time.
Deducting car loan interest on your tax returns can be a valuable write-off if you’re a small business owner or you’re self-employed. But before you claim this deduction be sure you qualify and work with a tax professional if you’re uncertain about how to calculate the exact amount you may be eligible to claim.