On Wednesday, December 31, 2025, the IRS issued proposed regulations, REG-113515-25, for the new deduction for “qualified passenger vehicle loan interest” under I.R.C. § 163(h). This provision allows eligible taxpayers to deduct interest paid on loans secured to purchase a new personal-use vehicle. This new deduction, created by Public Law 119-21, 139 Stat. 72, 176-179 (July 4, 2025) (also called the One Big Beautiful Bill Act), is in place for tax years 2025-2028.
Generally, the law provides that “qualified passenger vehicle loan interest” (QPVLI) is interest paid or accrued on debt incurred after December 31, 2024, for the purchase of (and secured by a first lien on) an “applicable passenger vehicle” (APV) for personal use. Deductible interest per year is capped at $10,000 and begins to phase out when modified adjusted gross income (MAGI) exceeds $100,000 (singles) or $200,000 (MFJ). The deduction is available regardless of whether the taxpayer itemizes deductions or takes the standard deduction. The statute specifies that an APV is a vehicle:
- where the original use commences with the taxpayer;
- that is manufactured primarily for use on public streets, roads, and highways (not including a vehicle operated exclusively on a rail or rails);
- that has at least 2 wheels
- that is a car, minivan, van, sport utility vehicle, pickup truck, or motorcycle;
- that is treated as a motor vehicle for purposes of title II of the Clean Air Act;
- that has a gross vehicle weight rating of less than 14,000 pounds; and
- where final assembly occurs within the United States.
The proposed regulations fill in many key details related to these statutory requirements.
Taxpayers Eligible for the Deduction
The proposed regulations clarify that QPVLI may be deducted by an individual, decedent's estate, or non-grantor trust. [Proposed §1.163-16(a)(2)(i)]. The interest may also be deducted by a grantor trust or disregarded entity where the owner otherwise qualifies for the deduction. The owner of the grantor trust or disregarded entity can be an individual, decedent's estate, or non-grantor trust. Business entities cannot satisfy the personal use requirement of I.R.C. § 163(h)(4)(B)(i) and Proposed § 1.163-16(f)(1).
Related Party Interest Not Deductible
Indebtedness between the taxpayer and a related party (within the meaning of section 267(b) or 707(b)(1) of the Code) is not a qualifying loan. Interest may not be deducted if the loan is provided by a related party. [I.R.C. § 163(h)(4)(E)(iii)].
Timing of Interest Payments
A payment on a qualifying loan is treated first as a payment of interest to the extent interest has accrued and remains unpaid as of the date the payment is due, and second, to the extent of any excess, as a payment of principal. [Proposed §1.163-16(c)(2)(ii)]. A simple interest calculation may be used to determine the amount of interest that has accrued and remains unpaid on a qualifying loan when a payment is made.
Interest That Does Not Qualify
The proposed regulations state that the deduction does not apply to interest paid on:
- a loan to finance fleet sales;
- a loan incurred for the purchase of a commercial vehicle that is not used for personal purposes;
- any lease financing;
- a loan to finance the purchase of a vehicle with a salvage title; or
- a loan to finance the purchase of a vehicle intended to be used for scrap or parts.
VIN Must Be Reported
To deduct QPVLI, a taxpayer must report the VIN of the purchased APV on the Schedule 1-A (or successor) or other form specified by the Secretary of the Treasury.
Impact of Refinancing
The proposed regulations specify that a new loan resulting from refinancing a qualifying loan continues to qualify for the deduction if the new loan is secured by a first lien on the APV, but only to the extent the amount of the new loan does not exceed the amount of the refinanced loan.
Change of Debtor
Interest paid on a qualifying loan is no longer eligible for the deduction if the obligor on the loan changes, with one exception. The proposed rules would allow the deduction if the obligor on the loan changes solely because of the death of the original obligor.
Original Use Must Commence with the Taxpayer
Original use commences with the first person that takes delivery of a vehicle after the vehicle is sold, registered, or titled. The proposed regulations clarify several common scenarios where original use will or will not commence with the taxpayer.
First, If a dealer uses a vehicle for test drives or as a demonstrator vehicle, and the dealer is not required to register or title the vehicle, original use of that vehicle would not commence with the dealer. A subsequent purchaser of that vehicle could satisfy the original use requirement.
Conversely, if the vehicle is registered or titled to the dealer, original use commences with the dealer. For example, if a dealer uses a vehicle as a courtesy car loaned to customers and state law requires that the dealer register or title the vehicle, original use of that vehicle would commence with the dealer.
The proposed rules also offer a narrow exception to the original use requirement where a vehicle is purchased but returned to the dealership within 30 days. Here, the original use of the vehicle may commence with a subsequent retail purchaser if the loan documentation treats the vehicle as a new vehicle. [Proposed §1.163-16(e)(2)(ii)].
Final Assembly Must Be in the U.S.
The proposed rules state that a taxpayer may establish that final assembly occurred within the United States by relying on (1) the vehicle's plant of manufacture as reported in the VIN under 49 CFR 565; or (2) the final assembly point reported on the label affixed to the vehicle as described in 49 CFR 583.5(a)(3). Taxpayers can determine whether the vehicle's plant of manufacture is located in the United States by following the instructions on the National Highway Traffic Safety Administration (NHTSA) VIN Decoder website: https://www.nhtsa.gov/vin-decoder.
Vehicle Must be for Personal Use
For interest to be deductible, the APV must be for personal use, not for use in a trade or business, for investment, or for other non-personal use. Costs of commuting between an individual's home and the individual's main or regular place of work are personal expenses. [See Revenue Ruling 99-7 (1999-1 C.B. 361) and §1.262-1(b)(5)]. The proposed rules interpret these provisions and allow the deduction for certain mixed-use vehicles.
Must Use Vehicle for Personal Use More Than 50 Percent of the Time
The proposed regulations recognize that many taxpayers purchase a vehicle and expect to use it partially for personal use and partially for non-personal use. Consequently, the rules provide that a taxpayer is considered to purchase the APV for personal use if, at the time the indebtedness is incurred, the taxpayer expects that the APV will be used for personal use more than 50 percent of the time. In other words, the vehicle must be predominantly used for “personal use,” but it can also be used for business or investment purposes.
Expected Personal Use Controls
In evaluating whether a taxpayer meets this personal use standard, the IRS may consider information relating to the expected usage of the vehicle, such as information contained in the loan documentation and the type of collision and liability insurance held with respect to a vehicle. The personal use requirement must be satisfied when the loan is secured. It is not an ongoing requirement. A taxpayer is not required to reevaluate personal and non-personal use in taxable years after the loan is secured. Differences between expected use and later actual use do not affect the taxpayer's eligibility to deduct the interest or the amount of the taxpayer's interest deduction. The taxpayer must evaluate and determine that the personal use requirement is met at the time the indebtedness is incurred.
Purchase for Family Members’ Use
The proposed rules provide that the APV may be purchased for use by the taxpayer’s spouse or dependents within the meaning of I.R.C. § 152(c)(2) or (d)(2). [Proposed §1.163-16(f)(1)].
The determination of whether a decedent's estate or non-grantor trust expects that an APV will be used for personal use is based on the expected personal use of the vehicle by the legatees or heirs, or beneficiaries who have a present or future interest in the decedent's estate or non-grantor trust; the spouse of such legatees, heirs, or beneficiaries; or an individual that is related to such legatees, heirs, or beneficiaries within the meaning of I.R.C. § 152(c)(2) or (d)(2), or a combination of these individuals. In the case of a decedent’s estate, the indebtedness would be a qualifying loan if it was a qualifying loan in the hands of the decedent.
Business and Personal Use
The proposed rules clarify that taxpayers may take any available interest deductions permitted under I.R.C. § 163(a) or a different section, but they may not deduct more total interest than is otherwise allowable. To ensure no amount of interest is deducted both as QPVLI and as some other type of deductible interest, the rules require a taxpayer to report any amount of independently deductible interest that is deducted in a taxable year as non-QPVLI on Form 1040 Schedule 1-A.
If a taxpayer meets the personal use standard (more than 50 percent of expected use of an APV for personal use), interest on the qualifying loan is considered QPVLI. The proposed regulations do not require the taxpayer to allocate amounts of loan interest between personal and business uses. Instead, they streamline the process by allowing all interest to be reported as personal interest. Alternatively, taxpayers may choose to deduct as a business expense interest properly allocable to a trade or business. Non-interest vehicle expenses deducted by a taxpayer under I.R.C. § 162(a) as trade or business expenses have no effect on interest deducted as QPVLI for that taxable year. These amounts are not subject to any of the proposed provisions relating to independently deductible interest. The proposed regulations include the following example to illustrate these provisions.
Example
During the taxable year, A paid $1,000 of interest on an SPVL that may be deductible by A as $1,000 of QPVLI. During the taxable year, 40 percent of the use of the APV is attributable to A's trade or business. A may deduct the full $1,000 as QPVLI after considering the application of the modified adjusted gross income phaseout in paragraph (h)(2) of this section as A's modified adjusted gross income is less than $100,000. $400 (40% of $1,000) is independently deductible interest because this amount is deductible as QPVLI and as business interest under section 163(a). Assume A may deduct the full $400 as business interest after considering any applicable limitations. A may deduct the interest paid on the SPVL in multiple ways including —
- A may deduct this $400 of interest as QPVLI. In this case, A would deduct all $1,000 of interest as QPVLI; or
- A may deduct this $400 as business interest. In this case, A would deduct $600 as QPVLI and $400 as business interest, because A must reduce its $1,000 of QPVLI by the $400 of interest deducted as business interest to determine the amount A can deduct as QPVLI. Additionally, A must report information relating to that independently deductible interest in the manner prescribed by the Internal Revenue Service in guidance published in the Internal Revenue Bulletin or in forms and instructions.
Deduction Cannot Exceed $10,000 Per Taxable Year
I.R.C. § 163(h)(4)(C)(i) provides that the deduction allowed for QPVLI by a taxpayer for any taxable year cannot exceed $10,000. The proposed regulations clarify that this $10,000 limit applies per Federal tax return. In other words, the maximum deduction allowed on a joint Federal income tax return is $10,000. On the other hand, the $10,000 limit applies separately to each taxpayer's return if a married couple files separately. The proposed regulations provide the following example to illustrate the application of the $10,000 limit to a mixed use vehicle.
Example
During the taxable year, A paid $12,000 of interest on an SPVL. During the taxable year, 30 percent of the use of the APV is attributable to A's trade or business. A may deduct up to $10,000 of the interest as QPVLI after considering the application of the dollar limitation and the modified adjusted gross income phaseout. $3,600 (30% of $12,000) is independently deductible interest because this amount is deductible as QPVLI and as business interest under section 163(a). Assume A may deduct the full $3,600 as business interest after considering any applicable limitations. A may deduct the interest paid on the SPVL in multiple ways including —
- A may maximize QPVLI deducted. A may deduct $10,000 of interest as QPVLI, and deduct the remaining $2,000 as business interest. Additionally, A must report information relating to that independently deductible interest in the manner prescribed by the Internal Revenue Service in guidance published in the Internal Revenue Bulletin or in forms and instructions; or
- A may maximize business interest deducted. A may deduct $3,600 of business interest, and the remaining $8,400 as QPVLI. A has $12,000 of interest paid on an SPVL and must reduce that by the amount of independently deductible interest of the taxpayer deducts as business interest ($3,600). Additionally, A must report information relating to that independently deductible interest in the manner prescribed by the Internal Revenue Service guidance published in the Internal Revenue Bulletin or in forms and instructions.
Qualifying Indebtedness
The proposed rules also specify that indebtedness is a specified passenger vehicle loan (SPVL) only if the indebtedness is incurred for the purchase of an APV and for items customarily and directly related to the purchased APV. These items include vehicle service plans, extended warranties, and sales taxes and vehicle-related fees. Indebtedness incurred for collision and liability insurance or to purchase any property or services unrelated to the APV (for example, a trailer or a boat) is not considered a SPVL.
Lender Reporting Requirements
The proposed regulations also detail the requirements of information reporting for businesses that receive interest totaling $600 or more in a calendar year. Reporting for calendar year 2025 is governed by Notice 2025-57, issued in October.
What’s Next?
Written or electronic comments on these proposed rules may be submitted by February 2, 2026. A public hearing on the proposed regs is scheduled for February 24. In the meantime, the newly published draft 2025 Form 1040 Instructions (Schedule 1-A) closely track these proposed regulations (see Page 108).