Tax time again? Hoping to deduct every possible expense you can? Of course you are. In an ideal world there would be a clear answer to whether or not a car loan is tax deductible, but keep in mind that you are dealing with the Internal Revenue Service where everything is murky at the best of times. One thing is clear, though: only the interest paid can be used as a tax deduction if the vehicle/car loan is claimed within one of the allowable categories.
Home Equity Loan (HELOC)
The Internal Revenue Service allows loan interest to be deducted in several categories: mortgage or home equity payments, student loan payments, business loan payments, and payments for specific types of personal loans. As you can see, car loans are not inherently tax deductible, but you can game the system a little bit. One way is to use a home equity line of credit (HELOC) to purchase the car. Of course, there are several downsides to using your home to secure a car loan. Unlike a car loan, for instance, a HELOC is a variable-rate loan. That means your rates can and will change over the course of repaying the loan. What’s more, a HELOC is a long-term loan, and chances are you’ll be repaying the loan long after the car you purchase with it is kaput.
Car as Business Expense
Another way that is used to make the interest on a car loan tax deductible is to claim the vehicle itself as a business expense. That requires that you have an EIN, and the ability to prove that the vehicle is mainly used for business purposes. Other than construction and outside sales heavy businesses, that can be very difficult. Slapping a magnetic sign or window stickers with your business name on them does NOT make your car a business expense. Here’s agood article in Entrepreneur about writing off your vehicle (or not).
The rewards are obvious: you owe Uncle Sam less at the end of the year or qualify for a larger refund. The risks are equally obvious: this deduction is a big red flag for audits, you are open to criminal charges of tax fraud, and there are the associated penalties and interest if the IRS determines that you are not eligible for the deduction.
So, for most people it is best to avoid trying to claim a car loan as a tax deduction. If you do want to move forward in this area, do so at the direction of your accountant, not anything you read on the internet.