Long gone are the days when any place you need to go is just a few blocks away. True, pedestrians get more exercise. Yet for the vast majority of adults, an automobile is an absolute necessity, even worth incurring debt to obtain one.
With car prices soaring, it is no surprise that more people resort to loans and lines of credit to procure new vehicles. These obligations can be burdensome month after month and few would fault a car loan debtor for wanting to defray the expense with a tax advantage. Is there such a thing as a car loan tax deduction?
History of Automobile Financing
During the first couple of decades of automobile use, cars were considered extravagances to be enjoyed only by the uber-rich. In other words, nobody owned a motor vehicle if it was unaffordable. However, when business owners recognized the profitability of speedier deliveries by truck and car, they petitioned for making payments on time because the vehicles were still too expensive.
General Motors observed this trend and pounced, inaugurating the General Motors Acceptance Corporation in 1924. This willingness to extend credit to its customers gave GM an early jump on competitors like Ford. Assuming an ever-growing portion of market share, GM served as an example to lenders that auto loans were lucrative.
Read More: What Are the Benefits of an Auto Loan?
Auto Loans and Income
Can I claim a car loan on my tax return? A car loan, or any other loan for that matter, is not counted as income by the U.S. Internal Revenue Service (IRS) because it is by definition a temporary conveyance of money. It must be returned to the lender, almost always with interest, so the loan amount need not be recorded on Form 1040.
That said, another question follows: is car loan interest tax deductible? Interest represents the cost of borrowing funds for a car or truck. It is over and above the loan amount. So, can you deduct car loan interest from your taxable income? After all, student loans, mortgage loans and many business loans come with deductible interest.
This goes to the nature of an automobile loan. The vehicle is subject to multiple purposes. As a general matter, personal loans do not carry deductible interest, whether they are installment loans or lines of credit. However, there are exceptions to that rule, i.e., a business owner who takes out a personal loan to invest in the enterprise.
The same rule applies to car loans. According to H&R Block, interest is non-deductible when the vehicle is used for personal reasons, but at least partially deductible when operated in the line of business.
Read More: What Do Banks Look for in Car Loans?
Make Sure to Document
This demands meticulous documentation regarding miles driven for business as opposed to other intentions. In addition, records of destinations and business transacted could be requested by the IRS before such allowances are made. Full exemption of interest from taxable income is possible if the car was purchased in the name of, and for the exclusive use of, the business itself.
Are Other Vehicle-Related Expenses Deductible?
Again, any deductions apply to auto usage while serving the needs of one's business. Other expenses eligible for deduction (by those standards) include maintenance, fuel, tolls, bridge fees, insurance, parking charges and oil changes. It can not be repeated often enough, keeping detailed and exhaustive records relative to the car and to your travels make the chances of deduction that much better.
The government has an interest in making the cost of doing business cheaper. Still, it remains the taxpayer's obligation to prove that the car is a business expense.
Read More: Self-Employed Tax Deductions, Benefits & More
Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.