What Dealerships Need to Know About the IRS Final Rules on Vehicle Loan Interest Deductions

By Nathaniel J. Yost, CPA

The IRS has officially issued final regulations on the new vehicle loan interest deduction created under the One, Big, Beautiful Bill Act (OBBBA). For automotive dealers, this temporary tax benefit—available for tax years 2025 through 2028 on loans originated after December 31, 2024—is one of the most powerful sales and finance tools to emerge in years.

To help your sales, finance, and accounting teams make the most of this opportunity—and keep your dealership compliant—here is a straightforward breakdown of how the rules work and what they mean for your showroom.

The Big Picture: How the Deduction Helps Your Buyers

For the first time in decades, eligible consumers can deduct qualifying personal car loan interest on their federal tax returns.

• The Benefit: Eligible buyers can deduct up to $10,000 in loan interest per year.
• Above-the-Line Relief: Customers do not need to itemize their deductions. Whether they take the standard deduction or itemize, they can claim this deduction directly against their income.
• Income Caps: The full deduction begins phasing out for individual buyers earning over $100,000 in modified adjusted gross income (MAGI) and married couples filing jointly earning over $200,000 (fully phasing out at $150,000 and $250,000, respectively).
• Personal Use Standard: The vehicle must be intended primarily for personal or family use (expected personal use must exceed 50% at purchase).
• First Lien and VIN: The loan must be secured by a qualifying first lien on the vehicle, and the buyer must report the vehicle’s VIN on the federal income tax return for each year the deduction is claimed.

Vehicle Eligibility: What Can You Sell With This Deduction?

To qualify as an “applicable passenger vehicle,” or APV, the vehicle must satisfy several statutory and regulatory requirements, including the following three requirements most relevant at the dealership level:

• Qualifying Vehicle Types: Cars, minivans, vans, SUVs, pickup trucks, and motorcycles with a Gross Vehicle Weight Rating (GVWR) of under 14,000 pounds.
• Made in the USA: Final assembly must take place in the United States. You and your customers can verify this instantly via the Monroney window label or through the NHTSA VIN Decoder tool.
• Brand-New ("Original Use"): The buyer must be the vehicle's first retail owner, and loan contracts must classify the vehicle as new.

What About Demos, Loaners, and Leases?

The IRS gave clear guidance on common dealership inventory questions:

• Demo Vehicles Qualify: If a new vehicle is used strictly for customer test drives while held for sale in inventory, the retail buyer is still considered the "original user." It qualifies!
• Service Loaners Generally Do Not Qualify: If a vehicle is placed in service as a customer loaner or otherwise held primarily for dealership operations rather than primarily for sale, its original use generally begins with the dealership. A later retail purchaser therefore generally cannot treat it as a new qualifying vehicle.
• Leases and Lease Buyouts Generally Do Not Qualify: Lease payments are not eligible for the interest deduction because a lease is not treated as a qualifying vehicle purchase loan. If the customer later finances the purchase of the leased vehicle, the new loan generally will not qualify because the vehicle’s original use began before the customer purchased it.

F&I Structuring: What Can Be Financed?

Your Finance & Insurance (F&I) office plays a critical role in maximizing this deduction for your customers. The qualifying portion of the loan may include the vehicle purchase price and items or amounts that are customarily financed in APV purchase transactions on an industry-wide basis and are directly related to the vehicle. Depending on the product’s specific terms, examples may include:

What Qualifies as Deductible Loan Indebtedness:

• The vehicle purchase price, destination fees, sales tax, doc fees, and title/registration fees.
• Customary add-ons: Extended warranties, vehicle service/maintenance contracts, tire and wheel protection, paint/fabric protection, key replacement policies, and GAP waivers.
• Dealership-installed vehicle accessories (e.g., bedliners, tow packages).

What Does Not Qualify:

• Negative Equity: Rolling an unpaid balance from a trade-in vehicle does not count toward the qualifying loan amount.
• Unrelated products or services (e.g., general auto liability insurance, financing a non-qualifying utility trailer on the same contract).

The F&I Workaround: Smart Down Payment Allocation

If a customer has $4,000 of negative equity rolled into the deal, does that destroy the deduction? No.

Under the final regulations, any customer cash down payment or net trade-in value is applied first to eliminate negative equity before being applied to the vehicle price.

Example: If a customer has $3,000 in rolled negative equity and puts down $3,000 in cash, the down payment completely wipes out the non-qualifying portion. The entire remaining financed balance qualifies for deductible interest!

Direct Lenders & "Buy-Here-Pay-Here" Compliance

If your dealership finances transactions through third-party lenders (banks, captive finance companies, credit unions), the lender generally handles year-end tax reporting. Dealerships should confirm responsibility with the third-party lender under their financing, assignment, and servicing arrangements.

However, if your dealership operates an in-house financing ("buy-here-pay-here") program where you hold the paper and collect customer interest directly:

• Form 1098-VLI Reporting: If an individual borrower pays you $600 or more in interest on a qualifying loan during the calendar year, you are legally required to file Form 1098-VLI with the IRS and provide a copy to the customer.
• Deadlines: Customer statements must be postmarked or furnished by January 31 following the close of the calendar year. Electronic filings with the IRS are due by March 31.
• Systems Check: Confirm that the dealer management system (DMS) or loan-servicing system can capture the borrower’s required identifying information, reportable interest, the outstanding qualifying principal at the beginning of the calendar year, loan origination and acquisition information, and the vehicle’s year, make, model, and VIN.

Next Steps for Your Team

1. Brief Your Sales Team: Make sure consultants know which new, U.S.-assembled models on your lot qualify so they can highlight this financial advantage to prospective buyers.
2. Coach F&I Managers: Train F&I staff on using customer down payments to offset negative equity, preserving full interest deductibility.
3. Audit Loan Software (BHPH Dealers): Review internal loan-servicing software now to ensure compliance with upcoming Form 1098-VLI deadlines.

Remember: Because eligibility depends on each customer's individual tax situation, sales and F&I teams should avoid guaranteeing any specific tax benefit or deduction.

The final regulations create opportunities for dealerships to enhance customer conversations while creating new compliance responsibilities for finance operations. Dealers should review sales processes, F&I procedures, and lending systems now to ensure they are positioned to take advantage of the deduction while meeting IRS requirements.

The Boyer & Ritter dealership team works with dealers throughout the region on tax planning, dealership operations, and compliance matters related to evolving federal tax rules.

About the Author

Nathaniel J. Yost, CPA, is a principal in Boyer & Ritter's Dealership Services Group, where he advises automobile dealerships on tax planning, business operations, and regulatory compliance matters. Contact nyost@cpabr.com or your Boyer & Ritter professional for more information.