Although you cannot deduct interest you pay on a car loan for a vehicle you drive entirely for personal use, you can deduct the interest as a business expense if you use the vehicle for business. The amount of deduction you are allowed to take depends on how often you use the vehicle for business reasons and how frequently you drive it for personal use.
Business Use
If you use a vehicle partially for business, but sometimes for personal use, you can deduct only the portion of expenses related to your business. It is not uncommon for small business owners, in particular, to use the same vehicle for both business and personal purposes. Under IRS guidelines, driving the vehicle when traveling from your home to your place of business is considered commuting miles and not business travel. Since the vehicle is not used exclusively for business, you cannot deduct the full amount of interest you pay on the auto loan. Even if a vehicle is titled in the name of your business, you must still divide expenses between business and personal use. A portion of your vehicle expenses may also be allowed as a deductible business expense if you work from a home office. To qualify as a business expense, you must travel from home to a location where you transact business.
Deducting Expenses on Schedule C
Enter expenses for business use of a vehicle in Part II Schedule C if you are the sole proprietor of a business. Go on to Part IV of the form. Enter the month, day and year you placed the vehicle in service for business purposes. If you originally bought the vehicle for personal use and then converted it to business use later on, the date on which you started using it for business is considered the date when you placed the vehicle in service. Schedule C requires you to indicate whether the vehicle was available to you for personal use during times when you were not operating your business and whether you or your spouse has another vehicle for personal use.
Other IRS Forms
Complete Part V, Section B, Information On Use of Vehicles on Form 4562 if you are taking a business deduction for a vehicle or vehicles not reported on Schedule C. Use Form 1065 to report a partner's share of deductions and Form 4562 to provide information related to the business use of a vehicle. Keep careful written records to support business expense deductions. Log the date, mileage and purpose each time you use the vehicle for business.
Difference Between Expense and Capital Expenditure
You may deduct interest you pay on a car loan you use to purchase a business vehicle as long as the expense meets the standard for an ordinary and necessary expense. The IRS defines an ordinary expense as any expense common in your trade or business. Deductible business expenses cannot be related to a capital expense. A capital expenditure is a cost that is not fully deducted in the year the expense is paid. Since it has a useful life that will last longer than the tax year, the cost must be depreciated over the life of the asset. However, for accounting purposes, costs that recur each month -- such as interest payments on a loan -- are often treated as expenses.
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