Is Car Loan Interest Tax Deductible? How To Write This Off
Most people who drive for business calculate their deduction using the standard mileage rate. This is definitely valuable and you should take it. But, don’t forget about these three often-overlooked business vehicle deductions for your business car.
You Normally Can’t Deduct Car Loan Interest
I know how quickly car loan interest can add up, particularly for more expensive vehicles. Unfortunately, you can’t deduct these costs if the car is for personal use.
But the IRS lets you potentially deduct these costs if it’s a business car. It can also be a vehicle you use for personal and business costs.
Car Loan Interest Is Tax Deductible If It’s A Business Vehicle
You cannot deduct the actual car operating costs if you choose the standard mileage rate. The standard mileage rate already factors in costs like gas, taxes, and insurance. You can’t even deduct depreciation from your business car because that’s also factored in.
If you use the standard mileage rate, you are still allowed to deduct the following three actual expenses:
- Interest on a car loan
- Parking fees and tolls for business trips
- Personal property tax that you paid when you bought the vehicle, based on its value
You can deduct these items because they are not included in the standard mileage rate amount.
Car Loan Interest That Is Tax Deductible
The largest expense is usually the business car loan interest. Unfortunately, many people fail to deduct it because of confusion about the tax law. You can’t deduct the loan interest on a personal car but you can for a business car.
You may deduct interest on a loan for a car you use in your business. Taxpayers can even deduct the interest if you take out a home equity loan to buy a business vehicle. If you’re an employee, you may not deduct interest on a car loan even if you use the car 100% for your job.
You can deduct only the business use percentage of interest and taxes on a car you use for business and personal reasons.
Example: Ralph uses his car 50 percent for his business and 50 percent for personal trips. He uses the standard mileage rate to deduct his car expenses. Ralph pays $3,000 a year in interest on his car loan. He may deduct 50% of this amount, or $1,500, as a business operating expense in addition to his business mileage deduction.
So, even if you use the standard mileage rate, make sure to keep track throughout the year of how much you spend for parking and tolls, and deduct it along with the business percentage of your car loan interest, and property tax you paid when you bought your car. These vehicle deductions can really add up.