Lenders Must Report Interest on U.S. Auto Loans

On September 8, 2026, the Internal Revenue Service (IRS) published final regulations implementing the interest deduction on loans for the purchase of specified vehicles assembled in the U.S. Taxpayers’ ability to deduct that interest comes with reporting and disclosure requirements for applicable lenders, similar to the requirements imposed on persons receiving mortgage loan interest. The final regulations become effective on November 9, 2026, and the deadline to provide interest statements to applicable taxpayers is January 31, 2027.

In 2025, Congress passed legislation providing the temporary ability to deduct up to $10,000 of interest paid on loans for the purchase of vehicles assembled in the U.S. That ability applies to indebtedness incurred after December 31, 2024, and continues through the taxable year ending December 31, 2028. The final regulations provide the following parameters for that interest deduction eligibility.

Eligible Taxpayers: The following taxpayers may deduct qualified interest, even if they do not itemize deductions:

• Individuals
• Decedent’s estates
• Non-grantor trusts
• The full deduction is available for taxpayers with modified adjusted gross income of up to $100,000, or up to $200,000 for joint filers. The eligible deductible amount decreases for taxpayers with higher incomes.

Eligible Vehicles: Financing of the following vehicles is eligible for the interest deduction:

• A passenger car, minivan, van, sport utility vehicle, pickup truck, or motorcycle (with gross vehicle weight rating of less than 14,000 pounds)
• Purchased for personal use
• Final assembly occurred in the U.S., as indicated by the Vehicle Identification Number (VIN) or reported on the affixed label.

Eligible Interest: Interest on only the following financing and amounts is eligible:

• Financing for a vehicle purchase (not lease financing) incurred after December 31, 2024
• Secured by a first lien (even if not yet perfected or recorded)
• Interest paid or accrued during the applicable taxable year(s) up to $10,000
• Interest, including prepaid interest, with respect to indebtedness incurred for vehicle and other items or amounts in the same transaction if those items are customarily financed in a vehicle purchase transaction and to the extent they are directly related to the vehicle purchase.
  • Examples of includable items/amounts:
    • origination-related or financing-related charges, prepayment penalties, late payment charges, default-related charges, and similar fees, if treated as interest for federal tax purposes;
    • vehicle service or repair plans, vehicle protection products, key fob replacement plans, warranties or extended warranties, guaranteed asset protection (GAP) waiver or insurance, credit insurance products, sales taxes, title and registration fees, and vehicle-related accessories.
  • Examples of excluded items/amounts: “negative equity” (described below), collision and liability insurance, and unrelated property or services like a trailer or boat.

The ability to deduct interest on U.S. vehicle loans, even temporarily, will surely appeal to taxpayers. However, it creates new and complex reporting and disclosure requirements for lenders and others, particularly considering how the IRS has parsed the amounts financed, and thus the eligible interest deduction, into included and excluded amounts.

For instance, as indicated above, the IRS considered but rejected the ability of taxpayers to deduct interest related to the financing of “negative equity.” “Negative equity” means existing indebtedness on a vehicle traded in as part of a purchase of a different vehicle, to the extent that indebtedness exceeds the vehicle’s trade-in value. The IRS determined that negative equity is not related to the purchase of the applicable vehicle. However, that amount, like certain other amounts the IRS has excluded, is customarily financed into new loans.

The reporting and disclosure requirements apply to “interest recipients,” defined as persons engaged in a trade or business, and including either the lender of record or a person receiving interest on the lender’s or another person’s behalf. To the extent an interest recipient receives at least $600 of interest on an applicable loan, the recipient must file with the IRS an information return for each such loan, including the taxpayer’s information, the interest recipient’s information, the amount of interest for the calendar year, the amount of outstanding principal, the date of loan origination, and the vehicle’s year, make, model, and VIN.

In addition, the interest recipient must furnish a statement to the interest payor of record, providing the interest recipient’s information, the other information described above in the IRS return, a legend identifying the information as important taxpayer information that is being furnished to the IRS, and discussing certain potential limitations on the payor’s ability to deduct the interest payment, among other information.

The IRS has published a draft Form 1098-VLI for reporting to the IRS and to the payor. While the IRS mentioned certain changes it intends to make to the instructions to that draft, it indicates the form and substance that the IRS will likely require.

Although the final regulations are new, the statutory authority to deduct vehicle loan interest dates back to loans incurred on and after January 1, 2025 (and before January 1, 2029). In the absence of regulations, the IRS and the Department of Treasury announced in October 2025 that they were providing “transitional relief” to lenders and other interest recipients for the tax year 2025. The agencies announced that for interest received on a qualifying vehicle loan in 2025, the interest recipients could meet their reporting obligations by making a statement available to the taxpayer, including through an easily accessible online portal, indicating the total amount of interest received. The IRS also announced that upon doing so, the agency would not impose penalties for failure to file information returns or provide payee statements. However, the transitional relief only applied for tax year 2025, and full compliance will be required for any subsequent tax years.