Are Car Payments Tax Deductible in 2025? Find Out Now

Car payments themselves are not fully tax deductible, but if you use your vehicle for business purposes, you can deduct a portion of your car expenses. The IRS allows you to write off business-related vehicle expenses, which can include a percentage of your car loan interest or lease payments. To maximize deductions, keep detailed records of business versus personal use. For example, if 60% of your car use is for business, you can deduct 60% of the qualifying expenses. This approach helps lower your taxable income, making it crucial for self-employed individuals and business owners to understand and apply these deductions correctly in 2024.

If you are a self-employed business owner and you finance or buy a car, can you write off car payments from your taxes?

Car loan payments and lease payments are not fully tax-deductible.

The general rule of thumb for deducting vehicle expenses is, you can write off the portion of your expenses used for business. So "no" you cannot deduct the entire monthly car payment from your taxes as a business expense.

However, the good news is you will still be able to write off a percentage of your car and truck expenses to lower your taxable income. As long as they are for business use, you'll be able to claim tax deductions on the expenses you incur for using your vehicle.

In this article, we'll review the three most common scenarios for deducting car payments from your taxes as well as give a short overview of the IRS-approved methods for writing off car expenses.

• The three most common scenarios for deducting car payments
• An overview of the IRS-approved methods for writing off car expenses

Note: If you want to claim all of your actual vehicle expenses from your taxes without the headaches of manually sorting through your receipts, try Bonsai Tax. Our software will scan your bank/credit card statements to discover all of your vehicle expenses as well as all the other deductions you qualify for. In fact, users typically save $5,600 with our app. Try a 7-day free trial today.

Are car loan payments tax deductible for personal vehicle use?

The majority of independent contractors and small business owners fall into this category.

If you use a personal car for business purposes, you will not be able to deduct your car payment if you bought this vehicle using a loan. If you use the same car for both personal use and business reasons, you can deduct a portion of your loan interest.

The IRS approves two methods for deducting vehicle expenses:

• The actual expense method
• The standard mileage rate

You can claim only one of the two methods in a tax year. After the first year, you can alternate between them. With both methods, report your total vehicle deduction on Schedule C of your 2024 tax return, which includes your car loan interest.

Since only one method can be claimed, you'll need to carefully calculate which one will lead to a greater tax deduction.

Car loan payments and actual vehicle expenses to deduct

The actual expenses method requires you to track and add up all the money spent on the business use of your vehicle. Although it may seem like a lot of extra work, apps like Bonsai Tax can make tracking receipts a breeze. The software can scan your bank/credit card receipts to discover potential business expenses to deduct from your taxes.

The actual expenses method generally saves business owners and independent contractors more money at the end of the tax year. Gig app workers like Grubhub contractors, Lyft or Uber rideshare drivers, and Instacart drivers may be an exception to this. Their business mileage may lead to a greater deduction than claiming the actual expense method.

A lease payment counts as an actual expense if you claim this method. This method does not include monthly payments or down payments for a car loan. However, you can deduct the business use percentage of your vehicle’s expenses listed below.

Actual vehicle expenses to deduct

Here is a list of business-related vehicle expenses you can deduct from your taxes when you use the actual method.

• parking fees
• gasoline expenses
• oil changes
• vehicle repairs (keep detailed records of your repair costs. Estimated costs do not count)
• tire replacement
• deduct interest on a loan for a car you use in your business
• vehicle insurance as a business expense
• licenses costs
• registration fees
• vehicle depreciation write off
• auto-loan lease payment (only the business portion of your lease payments)

Depreciation considerations for car loan tax deductions

1. For qualified entities using AEC from end to end, the IRS requires you to apply the Modified Accelerated Cost Recovery System (MACRS) formula for any car placed in service after 1986. However, for those starting with SMR transitioning to AEC, “use straight-line depreciation over the estimated remaining useful life of the car.” Consult your tax advisor to assist with calculations.
2. Congress caught onto the luxury consideration long ago, severely limiting the first-year depreciation deduction one can claim to a maximum of $10,200, plus $8000 bonus depreciation (applicable in 2021). The assumption here is that the registered owner or lessee used the car 100% for business - unlikely in the super-luxury arena.
3. On the other end of the spectrum - also assuming 100% usage and the AEC calculation - the federal Code (Section 179) provides a huge incentive for companies/partnerships to upgrade their owned fleets:

• By deducting 100% of the cost using the bonus depreciation in Year-1.
• Converging on certain business-dedicated 2021 model SUVs, trucks, and crossovers
• Demonstrating loaded vehicle weights between 6,000 and 14,000 pounds.
• Favoring models like the Sierra and Yukon models in the Buick range, and many more brands. Considering that even a small fleet often represents significant car numbers, mind-boggling potential savings on tax payouts figure into the equation.

Deducting actual expenses with leased vehicles

One of the big attractions for companies purchasing their vehicles lies in the depreciation write-offs. Since 2019, a 100% car price deduction is in the cards for numerous vehicles. However, if you lease your cars and opt to deduct actual vehicle expenses (i.e., not an owner), you can’t jump in on that. Instead, the lease’s business portion (which may or may not be 100%) is deductible, bringing us to the subject of income inclusion.

You derive the business portion only after deducting the income inclusion from the lease installments. Here's how it works:

• The IRS has a schedule that stipulates a value (i.e., commonly referred to as the threshold).
• Leasing fees connecting to dollars above the threshold doesn’t qualify for the deduction. You must subtract it from the gross lease payment.
• For example, the IRS pigeonholed cars leased in 2021 at a $51,000 threshold. All lease installments for cars below that number entering operation last year are fully deductible.
• While the idea of thresholds revolves around closing "unfairness gaps" between purchase and leasing options, it raises somewhat complicated issues to put to bed like:
• The lease amount combined with how many tax years the business used the leased vehicle.

The IRS changes the value every year (with an increase) applicable to the next five years.

Car loan payments and standard mileage rate deduction

The standard mileage rate method was introduced by the IRS to make it easier to write off vehicle expenses. Instead of tracking and recording all the business portion for your car expenses, you would simply track how many miles you drive for business. Remember, you cannot deduct actual car expenses separately.

You can use a mileage log to track of your business miles.

For example, let's say you drove 65,000 miles in a year for both personal and business use. If you drove 6,000 miles for business purposes, then you would multiply 6,000 by the year's standard mileage rate. In 2024, the standard mileage rate is 65.5 cents. So, your total tax-deductible expense would be $3,930.

It is also possible to claim the business miles for a leased vehicle.

If you use the standard mileage rate, you can still deduct these three actual expenses:

• Lease payments
• Tax and license fees
• Parking fees and tolls

• Business trip parking fees and tolls
• Based on its value, the personal property tax paid when you purchased the car
• Interest on a car loan

Use the Standard mileage deduction method for a simple way to calculate the business use of your vehicle expenses. Remember, you cannot use the lease payment as a deduction if you claim the standard mileage method. Try Bonsai's mileage tracker template to keep records for this deduction.

Pay attention to these car loan tax deduction details

If you're an auto lessee opting for a standard mileage rate in the first year, the IRS requires you to stay with it throughout the lease period.

If "self-employed" for tax purposes, the IRS advises you to elect the standard mileage rate option in Year-1 because it:

• Excuses you from applying for the same in any following year.
• Opens the door to switching back and forth between both methods.
• Leaves all future possibilities on the table if unsure.

With all that said, let's get to the unique characteristics of each method.

Deduct car loan payments for a company car as a business expense

Car loan payments are deductible only if the car is used 100% for business purposes.

This policy applies to company cars, not personal vehicles used for business purposes.

If you purchase a car strictly for business use, you can deduct the entire cost of business-owned vehicles and their operation. The IRS is often suspicious of claims for "only business" use. It is unlikely that a self-employed owner uses a vehicle 100% for business, so deducting the entire cost of your company car looks questionable.

We always recommend you work with a certified public accountant if you have any questions in regards to writing off your vehicle for business use.

Impact of recent or upcoming tax law changes on car loan interest deductions

How the 2024 tax law changes affect car loan interest deductions

The 2024 tax year introduces new rules that limit the deductibility of car loan interest for personal vehicles. Starting this year, the IRS no longer allows taxpayers to deduct interest on car loans used for personal purposes, such as commuting or leisure. This change follows the Tax Cuts and Jobs Act (TCJA) provisions that suspended many miscellaneous itemized deductions through 2025.

For example, if you financed a personal car with a $25,000 loan at 5% interest, the $1,250 annual interest is not deductible on your 2024 tax return. This applies even if you use the vehicle occasionally for business. The IRS clarifies that only interest on loans for business vehicles or qualified investments remains deductible.

Freelancers and small business owners should separate personal and business vehicle expenses carefully. Using a dedicated business vehicle and maintaining detailed mileage logs can help ensure that car loan interest remains deductible under current IRS rules. Use tax software like TurboTax or consult a tax professional to navigate these changes effectively.

IRS transition relief and exceptions for business use

The IRS provides transition relief for taxpayers who purchased vehicles before 2024 or who use their vehicles exclusively for business. Interest on loans for vehicles used 100% for business purposes remains deductible as a business expense on Schedule C or Form 1120S. This means freelancers who use their cars solely for client visits or deliveries can still claim the deduction.

Additionally, if you purchased a vehicle before the new rules took effect, you may be able to deduct interest paid on that loan for the remainder of the loan term, depending on your state. For example, California allows certain deductions to continue through 2025, but New York follows federal law strictly. Check your state’s tax guidelines to maximize deductions.

To claim these exceptions, maintain thorough records including purchase contracts, loan agreements, and mileage logs. Using apps like MileIQ or Everlance can automate mileage tracking and support your deduction claims during audits. Staying organized is crucial to take advantage of any available transition relief.

Planning ahead: strategies for 2025 and beyond

With the suspension of personal car loan interest deductions through 2025, freelancers and small business owners should plan vehicle financing carefully. Leasing a vehicle for business use may offer better tax benefits, as lease payments are often deductible in full or part. Evaluate lease versus loan options using calculators from Edmunds or Kelley Blue Book.

Another strategy involves maximizing the standard mileage deduction instead of tracking loan interest. For 2024, the IRS standard mileage rate is 65.5 cents per mile, which covers depreciation, maintenance, and loan interest. This method simplifies tax filing and often results in a larger deduction for business use of a personal vehicle.

Finally, consider consulting a tax professional before making large vehicle purchases or financing decisions in 2024 and 2025. They can help you understand how evolving tax laws impact your specific situation and recommend the most tax-efficient approach to vehicle expenses.

How to claim car loan interest on your taxes

Gather necessary documents and records

Start by collecting all documents related to your car loan and vehicle use. This includes your loan statements showing interest paid, purchase agreements, and mileage logs if you use the car for business. Accurate records are essential to support your deduction claims and avoid issues during audits.

For freelancers and small business owners, keeping a detailed mileage log is particularly important. Apps like MileIQ or Everlance can automatically track your business miles, making it easier to separate personal and business use. The IRS requires clear evidence of how much you drive for work versus personal reasons.

Organizing these documents early in the tax year simplifies the claiming process and ensures you don’t miss out on deductions. Regularly updating your mileage log and loan interest statements will save time when filing your taxes.

Determine if your car loan interest is deductible

Car loan interest is generally not tax deductible for personal use vehicles. However, if you use your car for business purposes, you may qualify to deduct part or all of the interest. The IRS allows deductions only on the portion of interest related to business use.

For example, if you drive 60% of your miles for business, you can deduct 60% of the interest paid on your car loan. Keep in mind this applies mainly to self-employed individuals or business owners who report vehicle expenses on Schedule C or similar forms.

Review IRS Publication 463 for detailed eligibility rules and exceptions. If you lease your car instead of owning it, the rules differ, so consult a tax professional to ensure compliance with 2024 tax regulations.

Calculate your business mileage and choose a deduction method

Accurately calculating your business mileage is crucial to determine the deductible portion of your car loan interest. Use your mileage log to total business miles driven during the tax year. The IRS standard mileage rate for 2024 is 65.5 cents per mile, which can be used to estimate vehicle expenses.

You can choose between the standard mileage deduction or the actual expense method. The actual expense method allows you to deduct costs of operating the vehicle, including loan interest, gas, maintenance, and insurance, prorated by business use percentage.

For example, if your total vehicle expenses are $5,000 and 70% of your miles are for business, you can deduct $3,500 using the actual expense method. Selecting the right method depends on your specific situation. Use tax software like TurboTax or consult a CPA to decide.

Report the deduction properly on your tax return

To claim car loan interest as a deduction, report the business-use portion of the interest on Schedule C if you're self-employed. Include it under "Car and truck expenses" along with other vehicle costs. Make sure to keep all supporting documents in case of an IRS audit.

If you are an employee, car loan interest is generally not deductible unless you qualify for specific exceptions, which are rare under current tax laws. For small business owners, accurately reporting this deduction can reduce taxable income and save money.

Use tax preparation tools like H&R Block or consult a tax professional to complete forms correctly. Update your records annually and review any changes in tax laws for 2024 to maximize deductions legally and effectively.

Who can deduct car loan interest on their taxes

Individuals using the car for business purposes

Car loan interest is tax deductible only if the vehicle is used for business purposes. Freelancers and small business owners who use their car primarily for work can deduct the interest on their car loan as a business expense. This deduction applies when the vehicle is essential for tasks such as client meetings, deliveries, or transporting tools.

For example, if you run a freelance photography business and use your car to travel to shoots, you can deduct the portion of your loan interest that corresponds to the business use percentage. The IRS requires you to keep detailed mileage logs to prove the business use versus personal use, which affects the deductible amount.

To claim this deduction, track total miles driven and miles driven for business during the 2024 tax year. Multiply your total car loan interest by the business-use percentage. Tools like MileIQ or Everlance simplify mileage tracking and improve accuracy for your tax records.

Limitations for personal car use

Car loan interest is not deductible if the vehicle is used solely for personal purposes. Commuting to and from work generally does not qualify as business use. Therefore, individuals who drive their personal car without a clear business use cannot deduct their car loan interest on their taxes.

Even if you occasionally use your car for work, the IRS requires that business use must be more than incidental to qualify for a deduction. For example, if you drive 10,000 miles annually and only 1,000 miles are for business, you can only deduct 10% of the loan interest. If business use is minimal, the deduction may not be worth the record-keeping effort.

Freelancers should carefully evaluate their mileage and consider whether the deduction will provide meaningful tax savings. If business use is under 50%, it might be simpler to deduct standard mileage rates or actual expenses related to business use instead of loan interest.

Special considerations for self-employed and employees

Self-employed individuals can deduct car loan interest as a business expense on Schedule C or Schedule F, depending on their business type. This deduction reduces taxable income and can be combined with other vehicle-related expenses such as gas and maintenance.

Employees cannot deduct car loan interest unless they qualify for specific exceptions, such as being a qualified performing artist or a member of the Armed Forces reserves. The Tax Cuts and Jobs Act of 2017 suspended miscellaneous itemized deductions for unreimbursed employee expenses through 2025, including car loan interest.

For 2024 tax filings, freelancers and business owners should consult IRS Publication 463 for detailed rules on vehicle expenses. Using accounting software like QuickBooks Self-Employed can help separate personal and business expenses, ensuring accurate deductions and compliance.