Self-Employed and the Vehicle Loan Interest Deduction
The new deduction for qualifying vehicle loan interest sounds straightforward enough — until the taxpayer is self-employed and uses the vehicle for business.
In this episode of Accounting in the Wild, Jason Dinesen takes a practical look at how the new vehicle loan interest deduction works when a vehicle has both personal and business use.
A key issue is whether the vehicle qualifies as a personal-use vehicle in the first place. Under the final regulations, that determination is based on the taxpayer’s intended use at the time the vehicle is purchased. If the taxpayer intends to use the vehicle more than 50% for personal purposes, it can qualify even if the actual business-use percentage later turns out to be higher.
From there, self-employed taxpayers have some flexibility. Jason walks through the regulations’ examples showing how qualifying interest can potentially be deducted entirely on Schedule 1A or allocated between Schedule 1A and Schedule C based on actual business use.
The episode also explores an important wrinkle: the $10,000 limitation applies to the Schedule 1A deduction, not to the portion properly deducted on Schedule C. That can make allocation particularly important when the taxpayer has substantial vehicle-loan interest.
Topics include:
- What makes a vehicle a qualifying personal-use vehicle
- Why the taxpayer’s intent at the time of purchase matters
- What happens when actual business use differs from expected use
- Allocating interest between Schedule 1A and Schedule C
- How the $10,000 limitation interacts with business-use interest
- Practical examples from the final regulations
For tax professionals working with sole proprietors and other self-employed taxpayers, this episode breaks down an easily overlooked intersection between a new individual deduction and familiar business vehicle rules.
Welcome to another Accounting in the Wild. My name is Jason Dinison. On this episode, we want to talk about self-employed people and that new deduction for qualifying vehicle loan interest. This is another solo episode of Accounting in the Wild. Thanks so much for joining us. So in my teaching, I get a lot of questions about how to handle that deduction for vehicle loan interest with self-employed people who also use the vehicle for business purposes. Now we can't answer that question without talking a little bit first about what this deduction even is. And it's actually timely to talk about this. I had this on my list anyway, but the Treasury Department just a few weeks ago released the final regulations on this deduction. So it's a timely topic. It's something that comes from the big beautiful bill, which adds a new deduction for interest paid on qualifying passenger vehicle loans. And the requirements are it has to be a new vehicle. The wording in the law is original use must start with the taxpayer. It has to be a personal use vehicle. The vehicle must be acquired for personal purposes. That's where we're going to be spending our time today, is that requirement. There's also a rule about final assembly has to take place in the United States, and there are AGI restrictions, and no more than $10,000 can be deducted in any one year. Now we're not getting into any of the other mechanics today in this session, any of the other mechanics of the deduction or how the AGI phase outs work or anything like that. We want to focus on the business use piece and the requirement that you can only take a deduction for vehicles acquired for personal purposes. So how do the self-employed handle this deduction? The law itself didn't say anything other than that the vehicle must be purchased for personal use. But thankfully, the regulations do tell us what to do. So in the regs, and there's a citation. I have it if you care. I'll try reading it here. The citation is 1.163-16 F1 tells us that a personal use vehicle is one that at the time of purchase the taxpayer intends to use more than 50% of the time for personal purposes. Note the use of the word intends, intends to use at the time of purchase, which means that this really is based on the dreaded facts and circumstances. So if we look at some examples straight out of the regulation, the first example in the reg is of a taxpayer who at the time of purchase expects to use the vehicle 85% of the time for personal purposes and 15% of the time in their sole proprietorship. This is considered a personal use vehicle, which means all of the interest can be deducted on Schedule 1A under this big beautiful bill deduction. Now we'll talk in a little bit about how you can also allocate between Schedule 1A and Schedule C, but just hold that thought. In the second example in that regulation, a taxpayer expects at the time of purchase to use the vehicle 40% for personal purposes and 60% for business use. So the taxpayer's intention at the time of purchase is less than 50% personal use, making this not a qualifying vehicle, which means none of the interest is deductible on Schedule 1A at all. Now, a really good question to ask at this point is how like how does this really work? How do you know? How do you expect to use something versus what actually happens in the real world? The preamble to the final regulations addresses that because that was brought up by commenters. And the Treasury Department is very clear that you do not have to run a test every year to see whether it's personal use or not. This determination is made at the time of purchase, and it's based on your intention at the time of purchase. And as the cliche goes, actual results may vary. And here's the thing: your lender is gonna care about that personal use piece of things. There's more than just this deduction and the IRS, it gets into the type of loan, the type of insurance coverage you can get, and so forth. So there actually are consequences to a taxpayer determining at the beginning what their intention is with a vehicle. So they can say I expect to use it 60% for personal and 40% for business, and then it ends up being the opposite, and nothing happens to them, they can still take the deduction on Schedule 1A. The next question that always comes up in this is do you have to allocate the deduction between Schedule 1A and Schedule C? And the answer is no, you don't have to, but you can and probably would want to most of the time. I have an article that I wrote about this, and one of the things that I'm thinking of now is that in that article I didn't address the times when you might not want to deduct it on Schedule C and just deduct it on Schedule 1A. I don't know why you would ever want to do that. Schedule C would be a good thing to deduct the interest on. But you don't have to. Let's just let's talk about what the regulations say. That's really all we can do is just say what the regulations say. The regulations give a lot of freedom for taxpayers on allocating the deduction for the maximum benefit. In the first example that we're given in the regulations on how this works, we have a self-employed taxpayer who pays $1,000 of interest on a qualifying new vehicle. Thankfully, the Treasury Department used a nice round $1,000 that gives us simple math. And this was expected to be a personal use vehicle at the time of purchase. And the actual usage ended up being sixty percent personal and forty percent business. The taxpayer has options here. One option is to simply deduct all $1,000 on Schedule 1A and zero on Schedule C because this is a qualifying personal use vehicle making all of that interest up to ten thousand dollars deductible on Schedule 1A. Or if they want to, they can deduct 40%, the business use percentage, on Schedule C. So they could put $400 on Schedule C and $600 on Schedule 1A. And like I said, I can't imagine why you wouldn't want to do it that way. But technically you're not required to do anything on Schedule C. You could put it all on Schedule 1A. Now what about the $10,000 limit on the deduction? That's only a Schedule 1A limitation. The regulations give us an example on that as well, where a taxpayer pays $12,000 of qualifying interest, and it's a personal use vehicle that in this example the IRS says they use for personal purposes 70% of the time and business purposes 30% of the time. $12,000 of interest paid. They could simply, because this is a personal use vehicle, deduct ten thousand dollars on Schedule 1A with no allocation required. $10,000 on Schedule 1A and that's it. Or they could start by claiming 30% of $12,000 on Schedule C. That's $3,600. That then leaves $8,400 of interest remaining that they could put on Schedule 1A. The $10,000 limit only applies to Schedule 1A. That also applies with the AGI limitations. It doesn't apply to a Schedule C deduction. By the way, one of the things that went through my head was how much of a car loan do you need in order to get a $10,000 deduction? That can be difficult to answer because of amortization schedules and interest rates and so forth. Interest rates on car loans can range from 5% to 15% or more, but at a rate of 6.5%, you would get to $10,000 of interest paid when the loan is approximately $164,000. So a person who could get a vehicle loan for that amount may be making more than the AGI thresholds on taking the deduction, so they might not be able to actually take a deduction because their AGI might be too high. But it is possible, and that would be the size of the loan. You'd be looking at like a hundred and fifty thousand plus. One, you have what is a qualifying personal use vehicle for being able to deduct vehicle loan interest on Schedule 1A. It keys around personal usage has to be more than 50%. And it's based on your intention at the time you purchase the vehicle. It's not based on actual usage. Then with deducting the interest for a self-employed person, you can either put all of the interest on Schedule 1A or you can allocate it between Schedule 1A and Schedule C. The allocation has to be based on actual usage. So you have options with what you do if you're self-employed and you have a vehicle loan. A qualifying vehicle loan, remember, this has to be on new vehicles weighing less than 14,000 pounds with final assembly taking place in the United States. Those are qualifying vehicles, and then it has to be a personal use vehicle. So that's a little bit about how the vehicle loan deduction works for self employed people. Thanks so much for joining us, and we'll talk to you again soon.