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IRS Issues Proposed Regs on Car Loan Interest Deduction
(Parker Tax Publishing January 2026)
The IRS issued proposed regulations regarding the deduction under Code Sec. 163(h)(4) for certain taxpayers for an amount up to $10,000 of qualified passenger vehicle loan interest. The proposed regulations: (1) provide rules relating to new vehicles eligible for the deduction; (2) provide rules for determining which vehicle loans qualify and the amount of interest paid on a loan that may be deductible; (3) provide rules for determining if a new vehicle is purchased for personal use; and (4) identify taxpayers who can take the deduction and clarify the $10,000 annual deduction limit. REG-113515-25.
Background
Code Sec. 163(a) allows a deduction for all interest paid or accrued within the tax year on indebtedness. Code Sec. 163(h) generally disallows a deduction for personal interest. Code Sec. 163(h)(1) provides that a taxpayer other than a corporation generally cannot take a deduction for personal interest paid or accrued during the tax year.
As added by the One Big Beautiful Bill Act (OBBBA), new Code Sec. 163(h)(4)(A) provides that for tax years beginning after December 31, 2024, and before January 1, 2029, personal interest does not include qualified personal vehicle loan interest (QPVLI). As a result, a deduction for QPVLI is allowable under Code Sec. 163(a) for tax years 2025 through 2028. Under Code Sec. 163(h)(4)(B)(i), QPVLI means any interest that is paid or accrued during the tax year on indebtedness incurred by the taxpayer for the purchase of, and that is secured by a first lien on, an applicable passenger vehicle (APV) for personal use, subject to certain enumerated exceptions in Code Sec. 163(h)(4)(B)(ii). Code Sec. 163(h)(4)(C) provides limitations on the amount of QPVLI that a taxpayer can deduct during a tax year. Code Sec. 163(h)(4)(D) defines an APV as a vehicle that satisfies the requirements of Code Sec. 163(h)(4)(D)(i) through (vi) but excludes from the definition any vehicle the final assembly of which did not occur within the United States. Code Sec. 163(h)(4)(E) provides the definition of "final assembly" and special rules on the treatment of a refinancing and related party indebtedness.
Under Code Sec. 63(a), "taxable income" generally means gross income minus deductions (other than the standard deduction). Code Sec. 63(b) provides that, for individuals who do not elect to itemize deductions, income means "adjusted gross income" (as defined in Code Sec. 62), minus the deductions enumerated in Code Sec. 63(b)(1) through (7). As amended by the OBBBA, new Code Sec. 63(b)(7) provides that so much of the deduction allowed by Code Sec. 163(a) as is attributable to the exception under Code Sec. 163(h)(4)(A) is subtracted from adjusted gross income in computing taxable income.
New Code Sec. 6050AA(a) provides that any person engaged in a trade or business who, in the course of that trade or business, receives from any individual interest aggregating $600 or more for any calendar year on a specified personal vehicle loan (SPVL), must file an information return reporting the receipt of interest and furnish a written statement to the individual from whom the interest is received. The IRS has issued draft Form 1098-VLI, Vehicle Loan Interest Statement, for lenders to report vehicle loan interest.
In October of 2025, the IRS released Notice 2025-57 to provide transitional guidance on the information reporting requirements under Code Sec. 6050AA. Notice 2025-57 provides that an interest recipient will be deemed to have satisfied the reporting obligations under Code Sec. 6050AA for interest on SPVLs received in 2025 if the interest recipient makes a statement available to the individual indicating the total amount of interest received in calendar year 2025 on an SPVL.
REG-113515-25
On December 31, 2025, the IRS issued proposed regulations in REG-113515-25 regarding the deduction for qualified passenger vehicle loan interest. The proposed regulations:
- provide rules relating to new vehicles eligible for the deduction, including for determining if the final assembly of a vehicle occurred in the United States;
- provide rules for determining which vehicle loans qualify and the amount of interest paid on a loan that may be deductible;
- provide rules for determining if a new vehicle is purchased for personal use; and
- identify taxpayers who can take the deduction and clarifying the $10,000 annual deduction limit.
The proposed regulations also provide guidance on the new information reporting requirements under Code Sec. 6050AA for certain persons who, in a trade or business, receive from any individual interest aggregating $600 or more for any calendar year on a specified passenger vehicle loan, including applicable penalties for failures to file information returns or furnish payee statements as required.
Taxpayers That May Deduct QPVLI
Code Sec. 163(h)(4)(B)(i) provides that QPVLI is interest paid or accrued on indebtedness incurred by the taxpayer for the purchase of an APV for personal use. Prop. Reg. Sec. 1.163-16(a)(2)(i) would provide that only individuals, decedents' estates, and non-grantor trusts may deduct QPVLI. This is because only those taxpayers could be considered to have purchased an APV for personal use.
Under existing rules (for example, Reg. Sec. 301.7701-3(b)), an entity may be disregarded as an entity separate from its owner for federal tax purposes. Accordingly, for federal income tax purposes (including for purposes of Code Sec. 163(h)(4)), activities of a disregarded entity are treated as the activities of the owner. Additionally, a grantor or other person treated as owning any portion of a trust under Code Secs. 671 through 679 (a grantor trust) is treated as the owner of the trust property for federal income tax purposes. For example, if a grantor trust acquires an APV and incurs a secured loan for its purchase, the grantor trust's deemed owner is treated as the owner of the APV and the obligor of the loan, and eligibility of the grantor trust's deemed owner to deduct the interest paid by the grantor trust as QPVLI is determined by disregarding the grantor trust and instead looking to the deemed owner to test whether all of the requirements for deductible QPVLI have been satisfied. In this case, the modified adjusted gross income phaseout (as would be provided in Prop. Reg. Sec. 1.163-16(h)(2)) is determined based upon the modified adjusted gross income of the deemed owner of the grantor trust, rather than the modified adjusted gross income of the grantor trust or any other person.
Thus, similar to the deduction for qualified residence interest under Code Sec. 163(h)(3), the proposed regulations would permit QPVLI to be deducted by an individual, decedent's estate, or non-grantor trust, including with respect to a grantor trust or disregarded entity deemed owned by the individual, decedent's estate, or non-grantor trust.
Code Sec. 63(b)(7) provides that the deduction for QPVLI is allowed for taxpayers who do not itemize deductions. Prop. Reg. Sec. 1.163-16(a)(2)(ii) would clarify that the deduction for QPVLI may be taken by taxpayers who itemize deductions and taxpayers who take the standard deduction. For taxpayers who itemize deductions, the deduction is available under the general rule of Code Sec. 63(a). For taxpayers who take the standard deduction, the deduction is available under Code Sec. 63(b)(7).
50 Percent Rule for Personal Use
Many taxpayers purchase a vehicle and expect to use it partially for personal use and partially for non-personal use. Code Sec. 163(h)(4)(B) does not require that a vehicle be purchased exclusively for personal use. Additionally, Code Sec. 163(h)(4) does not require that the person incurring indebtedness for the purchase of the vehicle be the same person that satisfies the personal use requirement. One member of a family may purchase a vehicle for personal use by another member of the family, and such purchase would satisfy the personal use requirement of Code Sec. 163(h)(4).
Prop. Reg. Sec. 1.163-16(f)(1) would provide that a taxpayer is considered to purchase that APV for personal use if, at the time the indebtedness is incurred, the taxpayer expects that the APV will be used for personal use by the taxpayer that incurred the indebtedness, or by certain members of that taxpayer's family and household, for more than 50 percent of the time. The proposed 50 percent threshold is intended to correspond to a vehicle being predominantly used for "personal use" within the meaning of Code Sec. 163(h)(4)(B)(i) while still allowing taxpayers with considerable non-personal use to benefit from the deduction.
Observation: The IRS notes that automotive retail installment sales contracts often indicate whether the purchased vehicle is for personal use or business use. Therefore, at the time a vehicle loan is incurred, the taxpayer financing the vehicle may have contemplated the intended use of a vehicle in a way that would facilitate evaluating this 50 percent personal use standard. In evaluating whether a taxpayer meets this personal use standard, it is intended that the IRS may consider information relating to the expected usage of the vehicle, such as information contained in the loan documentation and the type of collision and liability insurance held with respect to a vehicle.
Code Sec. 163(h)(4)(B)(i) could be read to require the personal use standard to be met only by reference to use by the taxpayer that incurred indebtedness to purchase the APV. However, the IRS states that such a narrow standard would appear contrary to Congressional intent in enacting Code Sec. 163(h)(4) and contrary to common practices of the purchase and use of vehicles by families. Accordingly, Prop. Reg. Sec. 1.163-16(f)(1) would adopt a broader standard to allow usage by the taxpayer that incurred the indebtedness, that taxpayer's spouse, or an individual that is related to the taxpayer within the meaning of Code Sec. 152(c)(2) or (d)(2), or any combination of these individuals to qualify.
The personal use requirement in Code Sec. 163(h)(4) is a requirement that must be satisfied in connection with the incurrence of indebtedness, as opposed to an ongoing requirement. As a result, a taxpayer is not required to reevaluate personal and nonpersonal use in tax years after the indebtedness is incurred. Differences between expected use and later actual use do not affect the taxpayer's eligibility to deduct QPVLI, nor the amount of the taxpayer's QPVLI. The taxpayer must evaluate and determine that the personal use requirement is met at the time the indebtedness is incurred.
Non-Personal Use and Independently Deductible Interest
Under Code Sec. 163(a), taxpayers may deduct interest that is QPVLI as a different type of interest in certain circumstances. For example, taxpayers paying interest attributable to a vehicle used in a trade or business may be able to deduct that interest as a business interest expense. The IRS understands that some taxpayers may prefer to deduct QPVLI as a different type of interest. Further, Code Sec. 163(h)(4) does not affect the ability of a taxpayer to deduct interest that is otherwise able to be deducted under Code Sec. 163(a) or a different Code section. Accordingly, the proposed regulations would provide certain rules with respect to interest that is both QPVLI and interest otherwise deductible under Code Sec. 163(a) or a different Code section. These proposed rules are intended to provide clarity for taxpayers and to prevent taxpayers from claiming duplicative interest deductions.
Prop. Reg. Sec. 1.163-16(g)(1) would provide that independently deductible interest means interest paid or accrued that is QPVLI (prior to the application of the $10,000 limitation in Code Sec. 163(h)(4)(C)(i) and in Prop. Reg. Sec. 1.163-16(h)(1) and determined without regard to Prop. Reg. Sec. 1.163-16(g)) and that also is deductible as a different type of interest under Code Sec. 163(a) or a different Code section.
Prop. Reg. Sec. 1.163-16(g)(2) would provide that all independently deductible interest may be deductible as QPVLI or may be deductible as a different type of interest described in Prop. Reg. Sec. 1.163-16(g)(1) (non-QPVLI). In addition, Prop. Reg. Sec. 1.163-16(g)(2) would provide that the amount of independently deductible interest that may be deductible as QPVLI (before the application of the $10,000 limitation in Code Sec. 163(h)(4)(C)(i)) is reduced dollar for dollar to the extent the taxpayer deducts that interest as non-QPVLI.
Observation: The proposed regulations make clear that taxpayers may take any available interest deductions permitted under Code Sec. 163(a) or a different section, but may not deduct more total interest than otherwise is allowable. To ensure no amount of interest is deducted both as QPVLI and as some other type of deductible interest, Prop. Reg. Sec. 1.163-16(g)(3) provides that a taxpayer must report any amount of independently deductible interest that is deducted as non-QPVLI on Form 1040 Schedule 1-A (or successor) or other relevant form. Non-interest vehicle expenses deducted by a taxpayer (for example, non-interest vehicle expenses deducted under Code Sec. 162(a)) would not affect the taxpayer's treatment of independently deductible interest or require any additional reporting.
Limitations of QPVLI
Code Sec. 163(h)(4)(C)(i) provides that the deduction allowed for QPVLI by a taxpayer for any taxable year cannot exceed $10,000. Code Sec. 163(h)(4)(C)(i) does not provide a different amount for joint filers (in contrast to Code Sec. 163(h)(4)(C)(ii), discussed below). Accordingly, Prop. Reg. Sec. 1.16316(h)(1) would clarify that this $10,000 limitation applies per federal tax return. Thus, the maximum deduction allowed on a joint federal income tax return is $10,000. If two taxpayers have a federal income tax return filing status of married filing separately, the $10,000 limitation would apply separately to each taxpayer's return.
Code Sec. 163(h)(4)(C)(ii) provides that the amount otherwise allowable as a deduction under Code Sec. 163(a) as QPVLI (after the application of the Code Sec. 163(h)(4)(C)(i) dollar limitation) is reduced (but not below zero) by $200 for each $1,000 (or portion thereof) by which the modified adjusted gross income of the taxpayer for the tax year exceeds $100,000. In the case of married taxpayers filing a joint federal income tax return, Code Sec. 163(h)(4)(C)(ii) provides that this reduction begins after the taxpayer's modified adjusted gross income exceeds $200,000.
Proposed Applicability Dates
The regulations under Code Sec. 163 are proposed to apply to tax years in which taxpayers may deduct QPVLI pursuant to Code Sec. 163(h)(4). The regulations under Code Sec. 6050AA are proposed to apply to calendar years in which taxpayers may deduct QPVLI pursuant to Code Sec. 163(h)(4). A taxpayer may rely on the proposed regulations under Code Sec. 163 with respect to indebtedness incurred for the purchase of an APV after December 31, 2024, and on or before the date these regulations are published as final regulations in the Federal Register, provided that the taxpayer follows the proposed regulations in their entirety and in a consistent manner. Similarly, interest recipients may rely on the proposed regulations under Code Sec. 6050AA with respect to indebtedness incurred for the purchase of an APV after December 31, 2024, and on or before the date these regulations are published as final regulations in the Federal Register, provided that the taxpayer follows the proposed regulations in their entirety and in a consistent manner.
For a discussion of the deduction for qualified passenger vehicle loan interest, see Parker Tax ¶83,523.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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