How Does The New Tax Deduction For Car Loan Interest Work? & NOL Deductions Can Ease The Pain Of Business Losses
How Does The New Tax Deduction For Car Loan Interest Work?
Generally, except for home mortgage interest, personal interest expense isn’t deductible for federal income tax purposes. With the passage of the legislation commonly known as the One Big Beautiful Bill Act (OBBBA), another exception has been added. That is, you might be able to deduct your car loan interest. But various rules and limits apply.
The specifics
The OBBBA allows eligible individuals, including those who don’t itemize deductions, to deduct some or all the interest on a car loan they take out to purchase a qualifying passenger vehicle. The maximum car loan interest you can deduct is $10,000 per year for 2025 through 2028.
But the deduction is phased out starting at $100,000 of modified adjusted gross income (MAGI) or $200,000 for married couples filing jointly. For an unmarried individual, the deduction is completely phased out when MAGI reaches $150,000, and for married joint filers, the phaseout is complete when MAGI reaches $250,000.
Another limit is that only certain vehicles qualify for the deduction:
- The vehicle must be a car, minivan, van, SUV, pickup truck or motorcycle with a gross vehicle weight rating under 14,000 pounds,
- The vehicle must have been manufactured primarily for use on public streets, roads and highways,
- The vehicle must be new, and
- The “final assembly” of the vehicle must have occurred in the United States.
You must report the vehicle identification number (VIN) on your tax return. A car assembled in the United States has a special VIN to signify that it’s American-made.
Loan-related requirements
The loan must be taken out after 2024 and must be a first lien secured by a vehicle used for personal purposes. If an original qualified car loan is refinanced, the new loan will be a qualified loan for purposes of the deduction as long as: 1) the new loan is secured by a first lien on the eligible vehicle, and 2) the initial balance of the new loan doesn’t exceed the ending balance of the original loan.
Also be aware that interest on loans from certain related parties doesn’t qualify. And lease financing isn’t eligible.
To claim the deduction, you’ll need to substantiate how much interest you paid during the year. For that, your car loan lender must file an information return with the IRS specifying the amount. (Transitional relief is available for 2025.)
Final thoughts
The new deduction for auto loan interest can make buying a car less expensive. But you need to consider the eligibility requirements. First, is your income below the phaseout threshold? Second, have you checked that the car you’re considering will qualify?
Also, don’t make a decision based solely on the ability to qualify for the tax deduction. In some cases, buying a used or foreign vehicle or leasing a vehicle might make more sense, even if you won’t be able to claim a tax deduction.
Finally, keep in mind that the deduction will expire after 2028 unless Congress acts to extend it. Have questions about the deduction? Contact us.
NOL Deductions Can Ease The Pain Of Business Losses
For income tax purposes, a business loss generally occurs when a business’s deductions for the year exceed its revenue. Any business, whether new or established, can face losses. Fortunately, the net operating loss (NOL) deduction can turn the pain of a loss this year into tax savings for next year and, perhaps, beyond.
How to qualify
Tax inequities can exist between businesses with stable income and those with fluctuating income. The NOL deduction helps address those inequities. It essentially lets the latter average out their income and losses over the years and pay tax accordingly.
For a business to qualify for the NOL deduction, the loss generally must be caused by deductions related to your business (Schedule C and F losses or Schedule K-1 losses from partnerships or S corporations), casualty and theft losses from a federally declared disaster, or rental property (Schedule E).
Determination of an NOL generally doesn’t include:
- Capital losses in excess of capital gains,
- Exclusion for gains from the sale or exchange of qualified small business stock,
- Nonbusiness deductions in excess of nonbusiness income,
- The NOL deduction, and
- The Section 199A qualified business income deduction.
Individuals and C corporations are eligible for the NOL deduction. While partnerships and S corporations generally aren’t eligible, their partners and shareholders can claim individual NOLs based on their separate shares of business income and deductions.
Limits apply
NOL deductions can’t offset more than 80% of taxable income for the year. Any excess NOLs can be carried forward indefinitely.
Suppose your NOL carryforward is more than your taxable income for the year you carry it to. If so, you may have an NOL carryover. That’s the excess of the NOL deduction over your modified taxable income for the carry-forward year. If your NOL deduction includes multiple NOLs, you must apply them against your modified taxable income in the same order you incurred them, beginning with the earliest.
“Excess” business losses
Under the Tax Cuts and Jobs Act (TCJA), an excess business loss limitation went into effect in 2021. That limitation applies at the partner or shareholder level, for partnerships or S corporations, after applying the outside basis, at-risk and passive activity loss limitations.
Under the excess business loss rule, noncorporate taxpayers’ business losses can offset only business-related income or gain, plus other income (such as salary, self-employment income, interest, dividends and capital gains) up to an inflation-adjusted threshold. For 2025, that threshold is $313,000, or $626,000 for married couples filing jointly. For 2026, the limit is reduced to $256,000 and $512,000, respectively. Any “excess” losses are carried forward and treated as NOLs.
Under the TCJA, the excess business loss limitation had been scheduled to expire after December 31, 2026. However, the Inflation Reduction Act extended it through 2028, and 2025 legislation has made it permanent.
Next steps
When it comes to business losses, the rules are complex, especially the interaction between NOLs and other potential tax breaks. Contact us for help charting your best path forward.