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.
If You Use Your Car for Business Purposes
You can’t claim a 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, or even to pick up a new flash drive at the office supply store or 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 53.5 cents per mile driven for business purposes in 2017, and 54.5 cents per mile in 2018. But again, you would count only business miles, 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.
When You’re an Employee
It used to be that the IRS would also let you deduct a portion of your auto loan interest if you work for an employer and your boss occasionally makes you drive your own car to take care of company business. This still holds true for the 2017 tax year – the tax return you would file in 2018 – but the Tax Cuts and Jobs Act eliminates this deduction beginning in 2018 through the end of 2025.
If you qualify for this deduction and want 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 means you can’t also claim the standard deduction for your filing status. You can use either the standard mileage method or your actual expenses, just as you could if you were self-employed.
Countable miles as an employee don’t include driving from home to work and back again. That’s considered commuting, a personal expense. And you can’t claim the miles if your employer reimburses you for the driving, although you’re not taxed on the reimbursement as income, either.
- H&R; Block: Filing – Adjustments and Deductions
- TurboTax: Business Use of Vehicles
- 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