How to Write Off the Interest on a Car Loan

Writing off the interest on a car loan can minimize your tax liability.

Car loans are often the largest expense for consumers, after housing. Most car loans are closed-end loan agreements that mandate a large monthly payment each month. This is required in order to quickly reduce a significant balance on a depreciating asset. However, if you use your car for business purposes, you can write off a percentage of the auto interest.

Things You'll Need

• Annual auto interest paid

Instructions

1. Contact your auto loan lender. Ask for an amortization schedule for your existing car loan. This will show the principal and interest payment details from month to month, and year to year. Add up the total interest charges for the entire year. Write down this figure.

2. Calculate the percentage you can deduct. If your car is used entirely for business purposes (that is, you must have a personal vehicle, too), you can deduct 100 percent of the interest. If you use the car for personal trips, too, you must calculate the percentage. For example, if you paid $3,900 in interest and used your car 65 percent of the time for business purposes, you can deduct $2,535 of that interest.

3. Use the IRS Form 2106, Employee Business Expenses, to add these deductions to your tax returns. Add the amount of interest you can deduct to the total of expenses listed from lines 22 through 29 (other vehicle expenses like oil costs, mileage, and repairs). Put this final sum on line 1.

4. File Form 2106 with the rest of your tax return forms. Include copies of all supporting documentation (amortization schedule for car loan, total interest paid). Submit these documents to your accountant for filing.

References

• Bankrate: Business Use of Vehicles
• Yahoo: 13 Most Overlooked Tax Deductions
• Turbo Tax: Car Interest Deduction

Resources

• Sample Schedule C
• Sample Form 2106
• IRS: Deductions, Auto Interest (for Business)