It’s not so much whether your car loan is in your name personally or in the name of your business that matters when determining if any part of the loan is tax deductible. It’s what you actually use the vehicle for and when you use it. In no case is the principal part of the loan deductible, but the interest portion might be under some isolated circumstances.
In certain circumstances like self-employment, you may be able to deduct the interest portion of your loan, but never the principal.
Car Tax Deduction
You can’t claim a car tax deduction for any part of a car loan if you use the vehicle solely for personal driving, but you can deduct a portion of the interest on Schedule C if you're self-employed and use the vehicle at least in part for purposes related to your business. This could mean driving to see clients, to service accounts, to pick up a new flash drive at the office supply store or even to swing by the bank or the post office.
Here’s how it works. You drove 15,000 miles total all year. You drove 5,000 of those 15,000 miles in the course of doing business. That works out to about 33 percent of your total miles attributable to business purposes. You could therefore deduct 33 percent of the interest you paid on your auto loan over the course of the year, as well as 33 percent of other auto-related expenses such as gasoline, maintenance and repairs.
Unfortunately, you won’t qualify for this deduction if you use your vehicle as a taxi or for other transport services. And if you make a stop for something personal while driving for business reasons, you’ll lose the remaining miles you drive after that stop. The entire excursion has to be purely work-related.
An Alternative Method of Calculation
You might also recoup some of what you spend on auto loan interest by using another method at tax time. The standard mileage rate method allows you deduct 54.5 cents per mile driven for business purposes in 2018. But again, you would count only miles driven in the course of doing business for the business mileage deduction, not your overall total.
Generally, you’re probably better off deducting your actual expenses if you drive a gas hog. If you drive a shiny, new economical Prius, you might come out ahead and get a greater deduction if you use the standard mileage rate.
2018 Tax Changes for Employees
It used to be that the IRS would also let you deduct a portion of your auto loan interest if you worked for an employer and your boss occasionally made you drive your own car to take care of company business. This held true for the 2017 tax year – the tax return you filed in 2018 – but the Tax Cuts and Jobs Act eliminated this deduction beginning in 2018 through the end of 2025.
If you qualified for this deduction and wanted to claim it, you would not file Schedule C with your return because Schedule C relates to self-employed income and business expenses. You would have to itemize your tax deductions on Schedule A, and this meant you couldn't also claim the standard deduction for your filing status. You could use either the standard mileage method or your actual expenses, just as you could if you were self-employed.
Countable miles as an employee didn't include driving from home to work and back again. That was considered commuting, a personal expense. And you couldn't claim the miles if your employer reimbursed you for the driving, although you were not taxed on the reimbursement as income, either.
- H&R Block: Filing – Adjustments and Deductions
- IRS: Topic Number 505 – Interest Expense
- Nolo: Deducting Business-Related Interest Loan Payments
- IRS: Standard Mileage Rates for 2018 Up From Rates for 2017
- IRS Video Portal: Schedule C – Who Needs to File and How to Do It
- Forbes: What Your Itemized Deductions on Schedule A Will Look Like After Tax Reform
- IRS. "Law Change Affects Moving, Mileage and Travel Expenses." Accessed Oct. 27, 2020.
- IRS. "Travel, Gift, and Car Expenses," Page 3. Accessed Oct. 27, 2020.
- IRS. "Travel, Gift, and Car Expenses," Page 4. Accessed Oct. 27, 2020.
- IRS. "Standard Mileage Rates." Accessed Oct. 27, 2020.
- IRS. "About Form 2106, Employee Business Expenses." Accessed Oct. 27, 2020.
- IRS. "Publication 529 (12/2019), Miscellaneous Deductions." Accessed Oct. 27, 2020.
- IRS. "Topic No. 510 Business Use of Car." Accessed Oct. 27, 2020.
- Congress. "H.R. 1," Page 1. Accessed Oct. 27, 2020.
- IRS. "Topic No. 502 Medical and Dental Expenses." Accessed Oct. 27, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.