The Department of the Treasury and the Internal Revenue Service (IRS) have issued Notice of Proposed Rulemaking REG-113515-25, providing guidance on the newly enacted deduction for Qualified Passenger Vehicle Loan Interest (QPVLI). These proposed regulations interpret amendments made to the Internal Revenue Code (Code) by the "One, Big, Beautiful Bill Act" (OBBBA), Public Law 119-21.

Statutory Framework

Section 70203(a) of the OBBBA amended Section 163(h) regarding the disallowance of personal interest by inserting a new paragraph (4). This statutory change creates a temporary exception to the personal interest disallowance rules. Specifically, "in the case of taxable years beginning after December 31, 2024, and before January 1, 2029, personal interest does not include QPVLI". Consequently, a deduction for QPVLI is allowable under Section 163(a) for these tax years.

The legislation creates a hybrid deduction structure. While functionally similar to an "above-the-line" deduction because it is available to non-itemizers, it is technically a modification to taxable income under Section 63. As amended, "new section 63(b)(7) provides that so much of the deduction allowed by section 163(a) as is attributable to the exception under section 163(h)(4)(A) is subtracted from adjusted gross income in computing taxable income". This distinction ensures the deduction is calculated after Adjusted Gross Income (AGI) is determined, preventing circular calculations with AGI-based phaseouts.

IRS Analysis of the Law

In the preamble to the proposed regulations, the IRS outlines the necessity of these rules to resolve substantial uncertainty regarding vehicle eligibility and the definition of personal use. The IRS notes that "section 163(h)(4)(B) defines QPVLI as any interest that is paid or accrued during the taxable year on indebtedness incurred by the taxpayer after December 31, 2024, for the purchase of, and that is secured by a first lien on, an applicable passenger vehicle (APV) for personal use".

The IRS analysis emphasizes that without regulatory guidance, taxpayers would face difficulties determining "whether their intended personal use of the vehicle is sufficient to claim the deduction or whether a vehicle meets the standard for U.S.-final assembly". To address this, the proposed regulations provide specific mechanical tests for "original use," "final assembly," and a safe harbor for the "personal use" requirement based on taxpayer expectation at the time of purchase.

Section-by-Section Analysis of Proposed §1.163-16

Eligible Taxpayers

The proposed regulations clarify that the deduction is limited to specific entities. Proposed §1.163-16(a)(2)(i) states that "only individuals, decedents’ estates, and non-grantor trusts may deduct QPVLI". Business entities are explicitly excluded because they "cannot satisfy the personal use requirement of section 163(h)(4)(B)(i)... and therefore would not qualify to deduct QPVLI".

For grantor trusts and disregarded entities, eligibility is determined by looking through to the owner. The regulations state that "eligibility of the grantor trust’s deemed owner to deduct the interest paid by the grantor trust as QPVLI is determined by disregarding the grantor trust and instead looking to the deemed owner to test whether all of the requirements for deductible QPVLI have been satisfied".

Definition of Qualified Passenger Vehicle Loan Interest (QPVLI)

Under Proposed §1.163-16(c)(1), interest qualifies as QPVLI only if it is "paid or accrued during the taxable year on indebtedness that is an SPVL secured by a first lien on an APV and is not excluded from the definition of QPVLI". The regulations define "secured by a first lien" as a "valid and enforceable security interest under State or other applicable law in an APV with status ahead of all other security interests". Exceptions are provided for tax liens or similar interests that may gain priority by operation of law.

The regulations provide two examples in Proposed §1.163-16(c)(6) to distinguish eligible purchases from leases and to address collateral substitution.

Example 1 addresses "Lease financing." It clarifies that even if a transaction is "properly viewed as a sale for Federal income tax purposes," if it constitutes a lease under State law where the taxpayer has usage rights but not title, "the transaction is not a purchase... and therefore the lease is not an SPVL".

Example 2 addresses "Defective vehicle replaced" (lemon laws). It illustrates the exception for unforeseen intervening events. Where a manufacturer replaces a defective vehicle (Vehicle 1) with a new one (Vehicle 2) under State law, and the lien transfers, the regulations hold that "Vehicle 2 is considered the initially purchased APV" and the interest remains deductible.

Specified Passenger Vehicle Loan (SPVL) and Allowable Principal

The definition of an SPVL is critical for calculating the deductible amount. The proposed regulations define SPVL as "indebtedness incurred by the taxpayer... for the purchase of, and that is secured by a first lien on, an APV for personal use".

Practitioners must carefully analyze the composition of the loan principal. Proposed §1.163-16(d)(2)(i) provides that indebtedness qualifies "only to the extent the indebtedness is incurred for the purchase of an APV as well as for any other items or amounts customarily financed in an APV purchase transaction and that directly relate to the purchased APV". Examples of qualifying financed amounts include "vehicle service plans, extended warranties, sales taxes, and vehicle-related fees".

Conversely, the regulations explicitly exclude "negative equity" from previous vehicle loans. "An amount representing negative equity under an existing loan on a trade-in vehicle is not described in proposed §1.163-16(d)(2)(i) because such negative equity is not an item or amount directly related to the purchased APV". Similarly, indebtedness incurred "to purchase collision and liability insurance or to purchase any property or services not directly related to the purchased APV (for example, a trailer or a boat)" does not qualify.

If a loan covers both qualifying and non-qualifying amounts (e.g., a car and negative equity), the debt must be bifurcated. The proposed regulations offer a favorable ordering rule for down payments: "any down payment or other consideration supplied by the taxpayer is applied first against any negative equity and any other amounts that are not incurred for the purchase of the APV".

The regulations provide specific examples illustrating these calculations, particularly regarding "customary" add-ons, non-vehicle property, and the treatment of negative equity.

Regulatory Examples of Loan Composition

Inclusion of Customary Add-Ons (Example 1)

The regulations provide a taxpayer-favorable definition of what constitutes the purchase price. Proposed §1.163-16(d)(6)(i) presents "Example 1," where an individual finances an Applicable Passenger Vehicle (APV). The retail installment sales contract includes the "APV purchase price, the cost for an extended warranty, sales tax, title and registration fees, and a dealer document fee".

The IRS analysis concludes that "All of the amount financed under the loan is incurred for the purchase of an APV and for other items or amounts customarily financed in an APV purchase transaction and that directly relate to the purchased APV". Consequently, the entire loan constitutes an SPVL, and "all of the interest on the loan may be deductible as QPVLI".

Exclusion of Unrelated Property (Example 2)

In contrast, Proposed §1.163-16(d)(6)(ii) ("Example 2") illustrates the necessity of bifurcation when unrelated property is financed on the same contract. In this scenario, a taxpayer incurs indebtedness "to finance the purchase of both an APV and a trailer," secured by a first lien on the APV.

The regulations hold that the portion of debt attributable to the trailer "is not incurred for the purchase of an APV... and therefore this indebtedness is not included in an SPVL". The taxpayer must allocate the indebtedness between the APV portion and the trailer portion. Crucially, "none of the interest that is attributable to that portion of the indebtedness [the trailer] is QPVLI".

Composition of Refinanced Loan Principal (Example 3)

This example illustrates the "tracing" rules required when a taxpayer refinances an existing Specified Passenger Vehicle Loan (SPVL) and receives additional cash proceeds. This directly impacts the calculation of the deductible Qualified Passenger Vehicle Loan Interest (QPVLI).

The Facts Taxpayer A originally incurs "Loan 1" to finance the purchase of an Applicable Passenger Vehicle (APV). In a subsequent taxable year, A refinances Loan 1 by incurring "Loan 2" in the amount of $38,000, secured by a first lien on the APV. At the time of refinancing:

The APV has a fair market value of $38,000.
The outstanding balance of Loan 1 is $30,000.
The proceeds of Loan 2 are used to pay off the $30,000 balance of Loan 1, with the remaining $8,000 distributed to Taxpayer A as "cash proceeds".

IRS Analysis and Holding The regulations apply a strict limitation on the principal eligible for the interest deduction upon refinancing. Under Proposed §1.163-16(d)(4), "the amount of the resulting indebtedness that exceeds the amount of such refinanced indebtedness" does not qualify as an SPVL.

Qualifying Principal: "Only $30,000 of the $38,000 balance of Loan 2 is an SPVL".
Non-Qualifying Principal: The $8,000 "cash-out" portion is excluded.
Interest Deduction: "None of the interest attributable to the $8,000 portion of Loan 2 is interest that is deductible as QPVLI".

Practitioners must calculate the interest deductibility by bifurcating the new loan. The interest expense must be allocated pro rata between the qualifying $30,000 portion (deductible) and the non-qualifying $8,000 portion (nondeductible).

Impact of Down Payments on Negative Equity (Example 4)

Perhaps the most technically complex example provided is Proposed §1.163-16(d)(6)(iv) ("Example 4"), which addresses "negative equity" rolled over from a trade-in vehicle. The regulations explicitly state that negative equity "is not an item or amount customarily financed in an APV purchase transaction that is directly related to the purchased APV". Therefore, interest attributable to negative equity is generally nondeductible.

However, the regulations provide a highly favorable ordering rule for down payments. Proposed §1.163-16(d)(2)(iii)(B) states that "any down payment (or other consideration provided by the taxpayer...) is applied first against any negative equity and any other amounts that are not incurred for the purchase of the APV".

Example 4 illustrates the mechanics of this rule:

Facts: A taxpayer buys a $40,000 APV. They trade in a vehicle with $6,000 of negative equity. They make a $4,000 cash down payment. The total financing is $42,000 ($40,000 car + $6,000 negative equity - $4,000 down payment),.
Analysis: The $6,000 negative equity is non-qualifying debt. However, the $4,000 down payment is allocated against the negative equity first.
Calculation: The remaining non-qualifying debt is $2,000 ($6,000 negative equity - $4,000 down payment). The qualifying SPVL is the full $40,000 purchase price of the APV.
Result: The taxpayer effectively deducts interest on $40,000 of the $42,000 loan, rather than having the down payment reduce the eligible principal.

Personal Use Requirement

The statute requires the vehicle be for "personal use." The proposed regulations adopt an "expectation" test rather than an actual use test. Proposed §1.163-16(f)(1) provides that a taxpayer satisfies the requirement "if, at the time the indebtedness is incurred, the taxpayer expects that the APV will be used for personal use... for more than 50 percent of the time".

This determination is made once. The IRS explains: "The personal use requirement in section 163(h)(4) is a requirement that must be satisfied in connection with the incurrence of indebtedness, as opposed to an ongoing requirement... Differences between expected use and later actual use do not affect the taxpayer’s eligibility to deduct QPVLI". Furthermore, the definition of personal use is broad, including use by the taxpayer, their spouse, or a related individual.

Proposed §1.163-16(f)(3) provides three examples illustrating the 50 percent threshold.

Example 1, "Predominant personal use," describes a taxpayer expecting to use a vehicle 85 percent for personal use and 15 percent for rideshare services. Because the expectation exceeds 50 percent, the taxpayer "is considered to have purchased the APV for personal use". Conversely, Example 2, "Predominant business use," shows that a 60 percent business use expectation disqualifies the vehicle entirely from QPVLI status.

Example 3, "Personal use by an individual related to taxpayer," clarifies that a parent may borrow to buy a car for a child. Because the child is related within the meaning of section 152(c)(2) or (d)(2), the parent is "considered to have purchased the APV for personal use".

Applicable Passenger Vehicle (APV) and Domestic Assembly

An APV must meet specific criteria, including that "the original use of which commences with the taxpayer" and that "final assembly... occur[red] within the United States".

Regarding original use, Proposed §1.163-16(e)(2)(i) states that "original use commences with the first person that takes delivery of a vehicle after the vehicle is sold, registered, or titled". For dealer demonstrator vehicles, original use generally does not commence with the dealer unless the dealer "registers or titles the vehicle to itself".

Proposed §1.163-16(e)(2)(iii) provides five examples clarifying this requirement, particularly regarding dealer usage and cancelled sales.

Examples 1 and 2 contrast dealer demonstrator vehicles. If a dealer titles and registers a vehicle to itself (Example 1), "Original use of the vehicle commences with Dealer" and a subsequent buyer cannot claim the deduction. However, if State law does not require titling/registration and the dealer uses it as a demonstrator (Example 2), original use "does not commence with Dealer" and a subsequent purchaser may qualify.

Example 3, "Cancelled sale," clarifies that if a buyer contracts for a vehicle but cancels prior to delivery, original use does not commence with that buyer, preserving the "new" status for a subsequent purchaser. Example 5 applies a similar logic to a "Returned vehicle," stating that if a retail purchaser returns a vehicle within 30 days, they are "not considered to be the first person that takes delivery," allowing the next buyer to establish original use.

For the domestic assembly requirement, taxpayers may rely on "the vehicle’s plant of manufacture as reported in the VIN... or the final assembly point reported on the label affixed to the vehicle".

Independently Deductible Interest

The regulations address the interaction between QPVLI and business interest. Proposed §1.163-16(g)(2) allows taxpayers flexibility, stating that "all independently deductible interest may be deductible as QPVLI or may be deductible as a different type of interest". However, double deductions are prohibited. The amount deductible as QPVLI is "reduced dollar for dollar to the extent the taxpayer deducts that interest as non-QPVLI".

Proposed §1.163-16(g)(4) offers three examples.

Example 1 illustrates a scenario where a taxpayer pays $1,000 in interest on a vehicle with 40 percent business use. The $400 of "independently deductible interest" (business interest) can be deducted either as QPVLI (if under the cap) or as business interest. However, the regulations mandate that the taxpayer "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".

Examples 2 and 3 illustrate the interaction of this ordering rule with the $10,000 dollar limitation. Example 3 highlights a planning opportunity: If a taxpayer has $15,000 of total interest (20% business use = $3,000), they can deduct the $3,000 as business interest and then deduct the remaining $10,000 as QPVLI (subject to the cap), effectively securing a $13,000 total deduction.

Dollar Limitation and Phaseout

The deduction is capped at $10,000. Proposed §1.163-16(h)(1) clarifies that "this $10,000 limitation applies per Federal tax return". This implies that married taxpayers filing jointly are limited to a single $10,000 cap, while married taxpayers filing separately are each subject to a $10,000 cap on their respective returns.

The deduction is subject to a phaseout based on modified adjusted gross income (MAGI). The deduction is reduced by "$200 for each $1,000 (or portion thereof) by which the modified adjusted gross income of the taxpayer for the taxable year exceeds $100,000" (or $200,000 for joint filers).

Proposed §1.163-16(h)(3) provides two examples illustrating the dollar limitation and the Modified Adjusted Gross Income (MAGI) phaseout.

Example 1 confirms that the "$10,000 limitation applies per Federal tax return." Thus, married taxpayers filing jointly with two separate vehicle loans are limited to a single $10,000 aggregate deduction.

Example 2 calculates the phaseout. A single taxpayer with MAGI of $124,200 ($24,200 excess) must reduce their deduction. The reduction is calculated as "$200 x 25 ($24,200 / $1,000 = 24.2 (which is then rounded up to 25))".

Section-by-Section Analysis of Proposed §1.6050AA-1

Reporting Requirements

New Section 6050AA requires information reporting by any person "engaged in a trade or business who, in the course of that trade or business, receives from any individual interest aggregating $600 or more for any calendar year on an SPVL".

Definitions

The "interest recipient" is generally the person receiving the interest, but look-through rules apply when interest is collected on behalf of another. Generally, "the person that first receives the interest generally would be required to report... and no reporting would be required upon the transfer of the interest... to the person on whose behalf the interest recipient received the interest".

The "payor of record" is defined as "any person carried on the books and records of the interest recipient as the principal borrower on the SPVL". If records do not specify a principal borrower, the recipient must designate one.

Filing and Furnishing

Interest recipients must file the required information return with the IRS "on or before February 28 (March 31 if filed electronically) of the year following the calendar year in which it receives the interest". The statement must be furnished to the payor of record "on or before January 31 of the year following the calendar year".

The statement furnished to the taxpayer must include a specific legend. Proposed §1.6050AA-1(g)(2)(ii) requires the statement to warn that "the payor of record may be unable to deduct the full amount of interest reported on the statement" due to statutory limitations.

Proposed §1.6050AA-1(b)(3) includes examples defining who constitutes an "interest recipient" required to file Form 1098-VLI.

Example 1 establishes that a "Car manufacturer finance subsidiary" is an interest recipient. Example 2 contrasts this with a physician who lends money to a friend; the physician is not an interest recipient because they do not receive the interest "in the course of the trade or business". Example 3 clarifies that a "buy here, pay here" dealership extending direct credit is an interest recipient.

Conclusion

These proposed regulations provide the necessary administrative framework for the temporary QPVLI deduction. Taxpayers may rely on these proposed regulations for indebtedness incurred "after December 31, 2024, and on or before the date these regulations are published as final regulations in the Federal Register, provided that the taxpayer follows these proposed regulations in their entirety and in a consistent manner".

Prepared with assistance from NotebookLM.