The One Big Beautiful Bill Act (OBBBA) gave individual borrowers a new deduction for interest on certain car loans. The deduction applies to taxable years 2025 through 2028 and allows up to $10,000 of qualified passenger vehicle loan interest per year, subject to an income-based limitation. It is available whether a taxpayer itemizes or claims the standard deduction. For lenders, the new consumer benefit comes with data and compliance obligations. Beginning with calendar year 2026, banks and credit unions that receive qualifying vehicle loan interest must report it on the new Form 1098-VLI.
Only Certain Loans Qualify
A specified passenger vehicle loan is debt incurred after December 31, 2024, to purchase an applicable passenger vehicle for personal use, secured by a first lien on that vehicle. The key date is when the loan was incurred, not the vehicle’s manufacture or model year.
An applicable passenger vehicle is a car, minivan, van, sport utility vehicle, pickup truck, or motorcycle manufactured primarily for public roads, with a gross vehicle weight rating of less than 14,000 pounds. Its original use must begin with the borrower, and its final assembly must have occurred in the United States.
Loans on used vehicles do not qualify. The statute also excludes lease financing, fleet-sale loans, commercial vehicles not used for personal purposes, salvage-title vehicles, vehicles bought for scrap or parts, and debt owed to a related party.
“First lien” refers to a first-priority security interest in the vehicle, not simply the first loan the borrower took out. A refinance can qualify if the original loan was itself a qualifying loan and the new loan is secured by a first lien on the same vehicle. The qualifying amount is capped at the outstanding balance of the refinanced loan on the refinance date. Where the new loan includes cash out or other non-qualifying amounts, principal and interest are allocated pro rata. A change in obligor generally ends qualification, except when it results from the obligor’s death.
Treasury acknowledged that refinance lenders often receive limited information about the prior loan, but concluded that lenders must still perform adequate diligence to determine whether a refinanced loan qualifies.
Lender Responsibility Versus Borrower Responsibility
Many lenders asked Treasury to make borrowers solely responsible for determining whether their vehicles qualify. Treasury declined. Lenders must make that determination and retain records supporting it, and Treasury did not provide a safe harbor for relying on dealer or manufacturer data.
As a practical matter, lenders with indirect dealer relationships may want standardized deal documentation confirming new-vehicle status, weight rating, and assembly location. For U.S. final assembly, lenders may rely on the plant of manufacture reported in the VIN, using the NHTSA VIN decoder, or on the final assembly point shown on the vehicle label. A brand or model name is not proof. Original use requires the vehicle to be treated as new in the loan documentation, and personal use means the borrower expected more than 50 percent personal use when the debt was incurred; lenders may rely on sufficient contract information absent conflicting information.
The borrower still determines the final deduction, including the dollar cap and income limitation. Form 1098-VLI is not a guarantee of deductibility, and the borrower statement must carry a legend saying so. Lenders may find language like this helpful in borrower communications:
“We report the interest you paid on loans that meet the IRS reporting requirements. Whether, and how much, you can deduct depends on your individual circumstances, including income limits. Please consult your tax advisor.”
2025 Relief Versus 2026 Reporting
For 2025 only, Notice 2025-57 let lenders satisfy reporting by making the total 2025 interest available to borrowers by January 31, 2026, through an accessible online portal, a monthly or annual statement, or similar means, with penalty relief for lenders that did so.
That relief does not carry forward, so for 2026, lenders use Form 1098-VLI, including for qualifying loans originated in 2025 that continue to generate interest in 2026. Final regulations (T.D. 10054), published September 8, 2026, and effective November 9, 2026, apply to calendar years 2025 through 2028, alongside the 2025 transition relief.
Reporting applies when a lender receives $600 or more of interest on a qualifying loan in a year. The threshold applies to each loan separately, not to the total across a borrower’s loans, and each loan gets its own form. Forms go to the payer of record, the principal borrower on the lender’s books; if records do not identify one, the lender must designate one.
Each form reports:
- Interest received on the qualifying portion of the loan only
- Vehicle year, make, model, and VIN
- Loan origination date and, if applicable, acquisition date
- Outstanding principal as of January 1, or as of origination or acquisition if during the year
- Refunds or credits of prior-year overpaid interest
- Checkboxes for original use with the payer of record and U.S. final assembly
Rolled-in negative equity from a trade-in is not part of the qualifying loan. By contrast, customarily financed items directly related to the purchase, such as sales taxes, title and registration fees, warranties, service contracts, and GAP, may be included, so a blanket exclusion of all add-ons would understate reportable interest.
Key 2026 Deadlines
- Borrower statements: February 1, 2027
- Paper filing with the IRS (if permitted): March 1, 2027
- Electronic filing with the IRS: March 31, 2027
These dates reflect the January 31, February 28, and March 31 deadlines in the regulations, adjusted for weekends. Filers with 10 or more information returns of all types in aggregate, not just Forms 1098-VLI, must file electronically absent a waiver. Electronic delivery to borrowers requires affirmative consent and specific disclosures; simply posting a statement to a portal is not enough.
Continue the Conversation
Vehicle loan interest reporting is one of several developments financial institutions are working through a year after OBBBA. Join Bonadio for “Tax Update: SALT, ROAD to Housing Act, & OBBBA One Year Later” on December 9, 2026, from 10:30 to 11:30 a.m. Presenters Jess LeDonne, Principal, Tax Technical Lead, and David Way, Principal, will cover recent legislative and regulatory guidance, tax strategy, and compliance priorities for banks and credit unions heading into 2027.
If you have any questions or are interested in learning more, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
