New Tax Deduction for Car Loan Interest: What the “No Tax on Car Loan Interest” Rule Means for California Taxpayers

The One, Big, Beautiful Bill introduced a significant and widely discussed tax change for individuals purchasing new vehicles: a new deduction for car loan interest. For many California taxpayers, especially business owners, creators, and professionals, this change could provide meaningful tax savings — if structured correctly.

At Velin & Associates, Inc., we’ve already started reviewing how this new deduction applies to real-world situations for our clients, from YouTubers and Shopify store owners to doctors, dentists, and high net worth individuals.

Below, we explain how this new rule works, who qualifies, what mistakes to avoid, and how strategic planning can maximize the benefit.

What Is the New Car Loan Interest Deduction?

Under the new provision enacted by the One, Big, Beautiful Bill, taxpayers may deduct interest paid on qualifying vehicle loans used to purchase new, Made-in-America vehicles for personal use.

This is a major departure from prior law, where personal car loan interest was generally not deductible at all.

Key highlights include:

• Applies to vehicle loans incurred after December 31, 2024
• Only applies to new vehicles, not used
• Vehicle must be assembled in the United States
• Vehicle must be purchased for personal use
• Available to both standard deduction and itemizing taxpayers
• Annual deduction capped at $10,000
• Applies at the federal level (state treatment may differ)

Who Can Benefit the Most?

This deduction is especially relevant for taxpayers who:

• Finance vehicles with higher interest rates
• Purchase higher-value vehicles
• Use personal vehicles alongside business activity
• Earn moderate to high income but still qualify under the rules

At Velin & Associates, we see strong potential benefits for:

• CPA for YouTubers and TikTokers purchasing reliable vehicles for content production logistics
• CPA for Shopify Store & Online Commerce clients who separate business and personal vehicle use
• CPA for Filmmakers and Creators who need personal vehicles but already depreciate business vehicles separately
• CPA for Doctors and Medical Practices with high income but clean personal vs. business expense separation
• CPA for High Net Worth Individuals optimizing deductions without itemizing

Example:

A Los Angeles-based YouTuber working with Velin & Associates purchases a new U.S.-assembled SUV in February 2025 for personal use. The vehicle is financed, and during 2025 the client pays $8,200 in loan interest.

Because:

• The vehicle is new
• Final assembly occurred in the U.S.
• The loan originated after December 31, 2024
• The car is used personally (not depreciated or expensed)

➡️ The full $8,200 may be deductible, even though the client takes the standard deduction.

This is especially helpful for creators who already maximize business deductions and no longer itemize.

Important Distinction: Personal Use vs. Business Use

This deduction applies only to personal-use vehicles.

If the vehicle is:

• Used primarily for business, or
• Claimed under Schedule C, an S corporation, or an LLC

Then different rules apply, and this deduction may not be available.

Example:

An Amazon Business CPA client purchases two vehicles:

• Vehicle A: Used 100% for warehouse operations and deliveries
• Vehicle B: Used personally by the owner

Only Vehicle B’s loan interest may qualify for this new deduction. Vehicle A is handled through traditional business expense and depreciation rules.

This distinction is critical and often misunderstood.

What Counts as a “Made-in-America” Vehicle?

The proposed regulations clarify that eligibility depends on final assembly occurring in the United States.

At Velin & Associates, we advise clients to:

• Verify final assembly location before purchase
• Keep purchase documentation
• Confirm VIN details if necessary

Many popular models qualify, but not all vehicles marketed by U.S. brands are assembled in the U.S.

The $10,000 Annual Cap

The deduction is limited to $10,000 per year per taxpayer.

Example:

A dental practice owner purchases a new U.S.-assembled vehicle and pays $13,500 in interest during the year.

➡️ Only $10,000 is deductible
➡️ The remaining interest is non-deductible

Proper planning — including loan structure and timing — can help manage this limitation.

What About Lender Reporting?

Lenders are required to report qualifying interest payments to the IRS. This information is used to substantiate the deduction.

From a taxpayer perspective, this means:

• Loan paperwork must be accurate
• Interest statements must be retained
• Incorrect lender reporting can delay or jeopardize deductions

At Velin & Associates, we routinely reconcile lender data with tax filings to avoid mismatches and audit triggers.

California Tax Considerations

While this is a federal deduction, California may not automatically conform.

For high-income clients and CPA for Medical Practice or CPA for Dental Business clients, this creates:

• Potential federal benefit
• No corresponding California deduction
• Planning opportunities around AGI and cash flow

This is especially relevant for High Net Worth Individuals managing multi-state tax exposure.

Common Mistakes We See

From our advisory work, the most common pitfalls include:

• Deducting interest on a used vehicle
• Mixing personal and business vehicle treatment
• Assuming all U.S. brands qualify
• Claiming more than $10,000
• Poor documentation

These mistakes often lead to disallowed deductions or audit exposure.

Strategic Planning Matters

This new deduction isn’t just about saving tax — it’s about structuring purchases correctly.

At Velin & Associates, we help clients:

• Decide whether a vehicle should be personal or business
• Coordinate depreciation, mileage, and interest rules
• Evaluate timing of vehicle purchases
• Integrate deductions into broader tax planning strategies

Final Thoughts

The new car loan interest deduction is a rare and valuable opportunity — especially for California taxpayers who rarely see new personal deductions.

However, the benefit is highly fact-specific, and small missteps can eliminate the savings entirely.

If you’re planning to purchase a vehicle or recently financed one, professional guidance is essential. For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

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