Proposed Regulations: Car Loan Interest Deduction (OBBBA)

Driving Deductions: IRS Unveils Rules for New Car Loan Write-Off

In a move poised to reshape tax planning for millions, the IRS today issued proposed regulations fleshing out the details of a new deduction for car loan interest, a key provision of the 'One, Big, Beautiful Bill Act' (OBBBA) enacted last year. This represents a significant departure from the general rule under Section 163(a), which allows a deduction for all interest paid or accrued within the taxable year on indebtedness, coupled with Section 163(h) generally disallowing a deduction for personal interest. The OBBBA, however, carves out an exception for what it terms "Qualified Passenger Vehicle Loan Interest" (QPVLI).

These proposed rules, impacting tax years 2025 through 2028, offer a potential tax break for those purchasing new vehicles. Perhaps most notably, the regulations extend this benefit not only to taxpayers who itemize their deductions but also, through an amendment to Section 63(b), to those who claim the standard deduction – a considerable expansion of the tax base eligible for this relief. As we approach the close of 2026, many taxpayers are undoubtedly eager to understand how these rules might impact their upcoming filings. The IRS seeks to bring clarity and address potential ambiguities.

Made in America: Strict Rules for Vehicle Eligibility

As we approach the close of 2026, many taxpayers are undoubtedly eager to understand how these rules might impact their upcoming filings. The IRS seeks to bring clarity and address potential ambiguities.

To qualify for the Qualified Passenger Vehicle Loan Interest (QPVLI) deduction under Section 163(h)(4), both the vehicle itself and the loan used to purchase it must meet stringent criteria. These rules are designed to target the incentive toward new, domestically produced vehicles.

• The Car: To qualify as an 'Applicable Passenger Vehicle' (APV), the vehicle must meet several crucial constraints:
  • Original Use: According to proposed § 1.163–16(e)(2)(i), original use must commence with the taxpayer. This means only new cars are eligible. The proposed regulations clarify that "original use commences with the first person that takes delivery of a vehicle after the vehicle is sold, registered, or titled." This excludes used vehicles or demonstrator models titled to the dealership.
  • Final Assembly: The vehicle's 'Final Assembly' must occur in the United States. Taxpayers can verify this requirement by referencing the Vehicle Identification Number (VIN). Proposed § 1.163–16(e)(3) provides that taxpayers may rely on the vehicle’s plant of manufacture as reported in the VIN under 49 CFR 565 to determine if final assembly occurred within the United States. The IRS directs taxpayers to the National Highway Traffic Safety Administration (NHTSA) VIN Decoder website.
• The Loan: The loan itself, termed a 'Specified Passenger Vehicle Loan' (SPVL) in proposed § 1.163–16(b)(15), must be specifically for the purchase of the APV.
  • This excludes lease financing. The proposed regulations also specify what can be included in the loan amount. While it can include 'customarily financed' items like warranties and sales tax, it cannot include negative equity from trade-ins, as detailed in proposed § 1.163–16(d)(2)(ii).
• Taxpayer: According to proposed § 1.163–16(a)(2)(i), the deduction is available only to individuals, estates, and non-grantor trusts. This is based on the premise that only these entities can purchase an APV for personal use.

The Commuter's Test: The 50 Percent Personal Use Standard

The proposed regulations introduce a crucial "personal use" standard that taxpayers must meet to qualify for the Qualified Passenger Vehicle Loan Interest (QPVLI) deduction under Section 163(h)(4). As a reminder, Section 163(h)(4) was added to the tax code by the One, Big, Beautiful Bill Act, and it provides an exception to the general rule that personal interest is not deductible. This exception allows taxpayers to deduct interest paid on loans used to purchase qualifying vehicles.

The definition of QPVLI in Section 163(h)(4)(B) requires that the loan be used to purchase a vehicle "for personal use." To clarify this, proposed § 1.163–16(b)(10) defines "personal use" as any use by an individual other than in a trade or business (except for performing services as an employee) or for the production of income. The IRS specifically notes that commuting expenses between home and work are considered personal expenses, citing Revenue Ruling 99–7 and § 1.262–1(b)(5).

According to proposed § 1.163–16(f)(1), a taxpayer is considered to purchase a vehicle for personal use if, at the time the loan is taken out, they expect that the vehicle will be used for personal use more than 50 percent of the time. The proposed regulations emphasize this is a one-time test based on intent.

Several key clarifications arise from this 50 percent rule:

• Taxpayer's Intent: The determination of personal use is based on the taxpayer's expectation at the time the loan is incurred.
• No Ongoing Tracking: Taxpayers are not required to track mileage or re-evaluate personal and non-personal use in later years. Differences between expected use and actual use do not affect the eligibility for the deduction, nor the amount that can be deducted. There is no "recapture" if actual use deviates from the initial expectation.
• Family Use: The proposed regulations expand the definition of personal use to include use by the taxpayer who incurred the debt, their spouse, or individuals related to the taxpayer within the meaning of Section 152(c)(2) or (d)(2). This means that the personal use of the vehicle by family members can be considered when determining if the 50 percent threshold is met.
• Estates and Trusts: Proposed § 1.163–16(f)(2) provides that for estates and non-grantor trusts, the determination of personal use is based on the expected personal use by the legatees, heirs, or beneficiaries.

Sticker Shock: Caps and Phaseouts Limit the Benefit

While the allure of deducting qualified passenger vehicle loan interest (QPVLI) is strong, taxpayers should be aware of limitations that significantly dampen the benefit. Section 163(h)(4)(C)(i) sets a hard limit: the deduction cannot exceed $10,000 per tax return. Proposed § 1.163–16(h)(1) clarifies that this $10,000 cap applies per return, meaning that even if a married couple filing jointly has significantly more than $10,000 in qualifying interest, their maximum deduction remains capped at $10,000. However, if two taxpayers file as married filing separately, each individual can potentially claim up to the $10,000 limit.

Further reducing the benefit, Section 163(h)(4)(C)(ii) introduces an income-based phaseout. The amount of QPVLI otherwise deductible under Section 163(a), after applying the $10,000 limit, is reduced by $200 for every $1,000 (or portion thereof) that the taxpayer's modified adjusted gross income (MAGI) exceeds $100,000 for single filers. For married taxpayers filing jointly, this reduction begins when their MAGI exceeds $200,000. For decedent's estates or non-grantor trusts, the MAGI threshold remains at $100,000.

Finally, taxpayers must also be aware of the "independently deductible interest" rule. Proposed § 1.163–16(g)(1) defines this as interest that qualifies as both QPVLI and is deductible under Section 163(a) or another section of the tax code. For example, interest paid on a vehicle used for business purposes might be deductible as a business expense. The new regulations, in Proposed § 1.163–16(g)(2), prevent "double-dipping." Taxpayers cannot deduct the same dollar as both QPVLI and, for example, as a business interest expense. If a taxpayer deducts independently deductible interest as something other than QPVLI, the amount of interest that can be deducted as QPVLI is reduced dollar-for-dollar. Proposed § 1.163–16(g)(3) specifies that any independently deductible interest deducted as something other than QPVLI must be reported on Form 1040 Schedule 1–A or other relevant form.

Red Tape for Lenders: New Reporting Requirements

The IRS is placing new compliance burdens on businesses that receive interest on specified passenger vehicle loans (SPVLs). Section 6050AA, enacted as part of the One, Big, Beautiful Bill Act (OBBBA), mandates information reporting to the IRS and to borrowers.

The Burden:

• Who reports: Under proposed § 1.6050AA–1(a), any trade or business receiving $600 or more in interest from an individual on an SPVL for a calendar year must report this information. This includes banks, credit unions, and other financial institutions, regardless of whether their primary business is lending. The "interest recipient" is defined as the business first receiving the interest, even if they collect it on behalf of another party.
• What to report: Proposed § 1.6050AA–1(f)(2) specifies that the information return must include: the name, address, and taxpayer identification number of the borrower; the name, address, and taxpayer identification number of the interest recipient; the amount of interest received for the calendar year; the amount of outstanding principal on the SPVL as of the beginning of such calendar year; the date of origination of such loan; the year, make, model, and VIN of the applicable passenger vehicle (APV) that secures such loan; and the date the SPVL was acquired.
• The Warning: Proposed § 1.6050AA–1(g) requires lenders to furnish statements to borrowers (specifically, the "payor of record") with a specific 'legend'. This legend must identify the statement as important tax information furnished to the IRS and warn that penalties may apply if the borrower overstates their interest deduction. Crucially, the legend must also state that the borrower may be unable to deduct the full amount of interest reported, given the limitations imposed by Section 163(h)(4)(C).
• De Minimis Reporting: To ease the reporting burden, proposed § 1.6050AA–1(a)(3) permits, but does not require, lenders to report interest of less than $600. This optional reporting allows lenders to assist clients in claiming smaller deductions, even if not strictly required.

As detailed in proposed § 1.163–16(g)(2), prevent "double-dipping." Taxpayers cannot deduct the same dollar as both QPVLI and, for example, as a business interest expense. If a taxpayer deducts independently deductible interest as something other than QPVLI, the amount of interest that can be deducted as QPVLI is reduced dollar-for-dollar. Proposed § 1.163–16(g)(3) specifies that any independently deductible interest deducted as something other than QPVLI must be reported on Form 1040 Schedule 1–A or other relevant form.

Winners and Losers: Domestic Makers Win, Leasers Lose

The IRS’s proposed regulations for the qualified passenger vehicle loan interest (QPVLI) deduction, introduced by Section 70203 of the One, Big, Beautiful Bill Act (OBBBA), create clear winners and losers within the automotive industry and among consumers. Section 70203 amended Section 163(h) of the Internal Revenue Code, which generally disallows the deduction of personal interest. The new Section 163(h)(4) creates an exception for QPVLI.

Winners:

• Domestic Manufacturers: The requirement that the vehicle undergo "final assembly" in the United States, as defined in 49 CFR 565.15(d)(2) gives domestic manufacturers a distinct advantage. By directing taxpayers to resources like the National Highway Traffic Safety Administration (NHTSA) VIN Decoder website, the regulations effectively promote vehicles assembled within the U.S.
• Dealers: The tax subsidy encourages consumers to purchase new vehicles rather than used ones, directly benefitting dealerships that primarily sell new cars. The 'original use' provision in Section 163(h)(4)(D), which requires the vehicle's original use to commence with the taxpayer, shuts out the used car market from eligibility.
• Purchasers: Taxpayers who finance the purchase of new, U.S.-assembled vehicles for primarily personal use stand to gain from the deduction, effectively receiving a government subsidy for vehicle ownership.

Losers:

• Leasing Companies: The proposed regulations explicitly exclude lease financing from the definition of QPVLI. This removes any tax incentive for consumers to lease vehicles, placing leasing companies at a disadvantage. As Section 163(h)(4)(B) specifies, QPVLI only applies to "indebtedness incurred...for the purchase of" a vehicle, not for leasing it.
• Foreign Manufacturers: The final assembly rule creates a barrier for foreign manufacturers, even those with a presence in the U.S., if their vehicles are assembled outside of the country.
• Used Car Market: The deduction is only available for vehicles whose "original use" commences with the taxpayer. This excludes the used car market, potentially impacting sales and pricing.
• Lenders: While lenders play a crucial role in facilitating the QPVLI deduction, they face a significant paperwork burden. The new Section 6050AA to the Code, which establishes information reporting requirements for QPVLI, requires any person who, in the course of a trade or business, receives from any individual more than $600 in a calendar year on a SPVL must provide an information return to the IRS and furnish a statement to the payor of record. The estimated paperwork burden associated with these new reporting requirements, including filing Form 1098–VLI, is substantial, estimated at 1.5 million hours annually.