Car Loan Interest Deduction, T.D. 10054, 91 Fed. Reg. 18219 (scheduled for publication Sep. 8, 2026)

The release of the final regulations under Treasury Decision (T.D.) 10054 marks a historic shift in the deductibility of personal interest, restoring a tax benefit for passenger vehicle financing that has been virtually non-existent since the passage of the Tax Reform Act of 1986. Enacted to implement the statutory changes introduced by the One, Big, Beautiful Bill Act (OBBBA) of 2025, these regulations provide the long-awaited administrative and interpretive framework for both taxpayers claiming the deduction and lenders navigating the accompanying information reporting requirements.

For CPAs, Enrolled Agents, and other tax practitioners, understanding the technical nuances of these regulations is critical. The rules govern not only the individual taxpayer’s ability to deduct up to $10,000 of interest paid on a specified passenger vehicle loan (SPVL) but also establish stringent new reporting obligations under Internal Revenue Code (I.R.C.) Section 6050AA, complete with electronic filing requirements and failure-to-file penalties. This article provides a comprehensive, highly technical analysis of T.D. 10054, focusing on the statutory alignment, revisions from the proposed regulations, and the IRS’s underlying legal justifications.

Legislative Background and Reasons for Regulatory Intervention

On July 4, 2025, Congress enacted Public Law 119-21, 139 Stat. 72, commonly known as the OBBBA. Section 70203(a) of the OBBBA amended I.R.C. Section 163(h) by adding a new paragraph (4), which carves out an exception to the general disallowance of personal interest for “qualified passenger vehicle loan interest” (QPVLI) incurred after December 31, 2024, and paid during taxable years beginning before January 1, 2029. Concurrently, Section 70203(b) of the OBBBA added Section 63(b)(7) of the Code, providing that this deduction is subtracted from adjusted gross income (AGI) to compute taxable income, making the deduction available to both itemizing and non-itemizing taxpayers. To police this new deduction, Section 70203(c) added I.R.C. Section 6050AA, requiring trade or business interest recipients who receive $600 or more of interest on a specified passenger vehicle loan in a calendar year to file an information return with the IRS and furnish a corresponding payee statement to the borrower.

The rapid introduction of these statutes created a “no-action baseline” characterized by “substantial uncertainty”. In the preamble to T.D. 10054, the IRS noted that “in the absence of regulations, taxpayers would face substantial uncertainty about which vehicle loan interest is eligible for the deduction”. Specifically, the automotive finance market utilizes complex contracts where the “amount financed” routinely includes auxiliary products, vehicle trade-ins with negative equity, and refinancing mechanisms. Lenders faced equal uncertainty regarding their compliance obligations under I.R.C. Section 6050AA. Therefore, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-113515-25) in the Federal Register (91 FR 67) on January 2, 2026, which has now been finalized, with critical taxpayer-friendly revisions, in T.D. 10054.

Overview of Added and Amended Regulatory Sections

T.D. 10054 amends 26 CFR Parts 1 and 301 by adding two major substantive income tax regulations and amending three procedural regulations:

Treas. Reg. § 1.163-16 (Added): Establishes the core requirements, definitions, limitations, and overall operational rules for individuals, decedents’ estates, and non-grantor trusts claiming the QPVLI deduction under Section 163(h)(4). It outlines the $10,000 annual dollar limit per return and the Modified Adjusted Gross Income (MAGI) phaseout rules.
Treas. Reg. § 1.6050AA-1 (Added): Prescribes the detailed information reporting requirements under Section 6050AA for lenders receiving interest on specified passenger vehicle loans. It specifies the required fields for the new Form 1098-VLI (Vehicle Loan Interest Statement) and establishes rules for foreign lenders, securitizations, and deceased borrowers.
Treas. Reg. § 301.6011-2 (Amended): Formally integrates Form 1098-VLI into the mandatory electronic filing regime, requiring lenders who file 10 or more information returns of any type during the calendar year to file Form 1098-VLI electronically.
Treas. Reg. § 301.6721-1 (Amended): Amends the definition of “information return” in paragraph (h)(3) to include returns required under Section 6050AA, subjecting lenders to statutory penalties for failure to timely file correct returns.
Treas. Reg. § 301.6722-1 (Amended): Amends the definition of “payee statement” in paragraph (e)(2) to include statements required under Section 6050AA, subjecting lenders to penalties for failing to timely furnish correct payee statements.

Key Revisions and Re-evaluations from the Proposed Regulations

In response to 63 public comments and testimony delivered at a public hearing on February 24, 2026, the Treasury Department and the IRS made several vital modifications to the proposed regulations to ease administrative burdens and align more closely with industry realities.

Delays in Lien Perfection and Involuntary Liens

Under I.R.C. Section 163(h)(4)(B)(i), interest only qualifies as QPVLI if the debt is “secured by a first lien on” an applicable passenger vehicle (APV). Proposed Treas. Reg. § 1.163-16(b)(14) strictly defined this as a valid, enforceable security interest under State law with absolute priority. Commenters pointed out that administrative title processing delays often cause a lag in lien perfection, and involuntary liens (such as mechanic’s liens or State tax liens) might temporarily take legal priority.

The IRS agreed with these concerns and added Treas. Reg. § 1.163-16(b)(15), which provides that:

“secured by a first lien” means the first voluntary security interest recorded against the vehicle, disregarding any involuntary liens that may be given temporary higher priority at a later date.

Furthermore, the final rules clarify that an APV is considered secured by a first lien:

“even in a case in which a lien has not yet been perfected or recorded due to processing times or other similar short-term delays arising under State or other applicable law, and in limited circumstances in which a lien is removed in connection with the taxpayer no longer owning the vehicle but the taxpayer continues to be liable for an SPVL, such as in the case of a repossession of the vehicle or an insurance payout following a total loss claim.”

This prevents a processing delay or a tragic vehicle loss from retroactively disqualifying a taxpayer’s interest deduction.

Broadening of Vehicle Classification Types

I.R.C. Section 163(h)(4)(D)(iv) restricts the deduction to six vehicle types: cars, minivans, vans, sport utility vehicles (SUVs), pickup trucks, and motorcycles. The proposed regulations sought to define these categories by strict reference to Environmental Protection Agency (EPA) definitions. Commenters flagged that these rigid EPA definitions, which depend heavily on gross vehicle weight rating (GVWR) or curb mass (e.g., limiting SUVs to 10,000 lbs and pickup trucks to 8,500 lbs), directly clashed with the OBBBA’s broader statutory 14,000-pound GVWR limit.

To eliminate this conflict and simplify administration, the final regulations under Treas. Reg. § 1.163-16(b)(14) “provides broader definitions of sport utility vehicle, pickup truck, and motorcycle that do not reference a GVWR or curb weight limitation for vehicles.” Vans and minivans, however, remain defined by direct reference to EPA regulations under 40 CFR.

Expansion of Customarily Financed Expenses

Auto loan contracts typically finance more than just the bare sticker price of the vehicle. Under proposed Treas. Reg. § 1.163-16(d)(2)(i), an SPVL could include “items or amounts customarily financed in an APV purchase transaction that are directly related to the purchase of the APV,” but the proposed list of examples was limited to vehicle service plans, extended warranties, sales taxes, and vehicle-related fees.

The IRS accepted industry feedback and expanded this list in Treas. Reg. § 1.163-16(d)(2)(i) to include:

Vehicle repair plans.
Mechanical repair coverage.
Vehicle protection products (tire, wheel, paint, and interior protection).
Guaranteed Asset Protection (GAP) insurance or waivers.
Credit-related insurance products (credit-related accident, health, and life products).
Key fob replacement.
Title and registration fees, as well as vehicle-related accessories purchased as part of the transaction.

This expansion is highly beneficial, as interest on the debt incurred for these protective and transactional products is fully deductible. Conversely, the regulations make clear that “the purchase of an APV, in whole or in part, with a credit card would generally not result in an SPVL” because credit card debt is unsecured.

Allocation of Indebtedness and the Exclusion of Negative Equity

One of the most contentious issues during the notice-and-comment period was the treatment of “negative equity”—the unpaid debt on a traded-in vehicle that is rolled into the new car loan. Lenders urged the IRS to treat the entire consolidated loan as an SPVL due to the systemic burden of tracking separate loan portions. The IRS firmly rejected this, maintaining that negative equity represents debt related to a “prior purchased vehicle” and is not incurred “for the purchase of” the new APV.

Under Treas. Reg. § 1.163-16(d)(2)(ii), negative equity is defined as “existing indebtedness on a vehicle traded in as part of a purchase transaction for an APV, to the extent such indebtedness exceeds the vehicle’s trade-in value.” To ensure compliance, the final regulations require a strict pro rata allocation method when a loan is partially an SPVL and partially non-qualifying. Interest and principal payments must be allocated on a pro rata basis.

For example, if a taxpayer purchases an APV for $36,000 and rolls in $4,000 of negative equity (total loan of $40,000), 90 percent ($36,000 / $40,000) of each interest payment is deductible as QPVLI, while the remaining 10 percent is non-deductible personal interest. However, the IRS did provide a taxpayer-friendly “down payment allocation” rule in Treas. Reg. § 1.163-16(d)(2)(iii)(B): any down payment (or trade-in value) is applied first against negative equity and non-qualifying amounts. If the taxpayer in the above example made a $4,000 cash down payment, that cash would wipe out the negative equity, leaving the entire $36,000 loan as a fully qualifying SPVL.

Refinancing and the Original Obligor Restriction

I.R.C. Section 163(h)(4)(E)(ii) permits refinanced auto loans to qualify as SPVLs, but only “to the extent the amount of such resulting indebtedness does not exceed the amount of such refinanced indebtedness.” Proposed Treas. Reg. § 1.163-16(d)(4) limited the new qualifying debt to the “outstanding balance” of the original SPVL on the date of refinancing.

The IRS declined to allow taxpayers to roll in new auxiliary products (such as a new GAP policy or refinancing charges) during a refinancing. The IRS ruled that:

“The inclusion of amounts in excess of the amount of the refinanced loan, even if such amounts are attributable to products or amounts related to or customarily incurred with the purchase of an APV, would conflict with the plain language of the statute.”

However, the final regulations add that “accrued but unpaid interest on the refinanced SPVL” can be capitalized into the new loan and qualify as an SPVL. Furthermore, if a new co-borrower is added during a refinancing, the loan “continues to be an SPVL with respect to the original obligor(s), but is not an SPVL with respect to the new obligor(s).” If the refinancing involves a change in obligor due to the death of the original obligor, the loan remains an SPVL for the successor.

Original Use Commences with the Taxpayer

To prevent used cars from qualifying for the deduction, Section 163(h)(4)(D)(i) requires that the “original use” of the vehicle must commence with the taxpayer. Commenters voiced concern that State titling and registration laws for “demonstrator vehicles” used by dealers would prevent subsequent purchasers from meeting this requirement.

The IRS resolved this by aligning the definition of “original use” with the depreciation principles of I.R.C. Section 168(k)(2)(A)(ii). Under Treas. Reg. § 1.163-16(e)(2)(ii), the “original use of a vehicle held by a dealer does not commence with the dealer if the vehicle is held primarily for sale to customers in the ordinary course of the dealer’s business.” A dealer’s use of a vehicle as a demonstrator does not constitute “original use”. Additionally, for any borrower, “original use of the vehicle does not commence with that purchaser unless the loan documentation treats the vehicle as a new vehicle.”

Legal Justifications and Statutory Interpretation

Throughout the preamble to T.D. 10054, the IRS and Treasury relied heavily on strict statutory construction to justify their regulatory boundaries, repeatedly refusing to create non-statutory safe harbors that would contradict the plain language of Public Law 119-21.

Defense of the Allocation Mandate

Lenders protested that having to separate the vehicle’s purchase price from negative equity or unrelated consumer products was too burdensome. The IRS responded that the allocation approach:

“is necessary to ensure compliance with the statutory requirement that only interest ‘for the purchase’ of an APV is deductible under section 163(h)(4).”

The IRS stood firm, noting that allowing negative equity in an SPVL would allow taxpayers to deduct interest on “indebtedness incurred prior to 2025 or for the purchase of a vehicle that is not an APV,” which is statutorily forbidden.

Personal Use Tested at Loan Origination

Under I.R.C. Section 163(h)(4)(B)(i), the APV must be acquired for “personal use.” Proposed Treas. Reg. § 1.163-16(f)(1) established a “predominant use” standard: at the time the debt is incurred, the taxpayer must expect to use the vehicle for personal purposes more than 50 percent of the cumulative ownership time.

Practitioners questioned whether this personal use test was an annual requirement or a one-time test. The IRS clarified that the personal use requirement:

“is a requirement that must be satisfied at the time the indebtedness is incurred, and not an ongoing requirement. Accordingly, differences between expected use at the time the indebtedness is incurred and later actual use of the vehicle do not affect the personal use determination.”

The IRS justified this “one-and-done” test by noting that an annual certification or tracking requirement “would result in considerable compliance burden to taxpayers.”

Refusal to Exempt Small Lenders from Reporting

Various commentators, representing credit unions and small financial entities, requested a complete exemption or delayed implementation of the Section 6050AA reporting requirements due to the high costs of modifying software systems. Under the Regulatory Flexibility Act (RFA), the IRS acknowledged that the rules would “likely have a significant impact on a substantial number of small entities” (estimating that of 36,000 affected lenders, 24,600 are small entities).

Nevertheless, the IRS concluded that “the statutory language does not authorize or support separate information reporting requirements for small entities”. Delaying reporting for small lenders “would increase the burden on individuals who need the information reported under section 6050AA to accurately claim the deduction for QPVLI on their Federal income tax returns.”

Effective Dates, Transition Relief, and Reliance

Understanding the timeline of REG-113515-25 and T.D. 10054 is crucial for practitioners filing returns for the 2025 and 2026 tax years.

Transition Relief under Notice 2025-57

Because the OBBBA was signed into law on July 4, 2025, but applied retroactively to indebtedness incurred after December 31, 2024, lenders had no systems in place to track SPVL interest or capture VINs during 2025. Recognizing this impossibility, the IRS issued transitional guidance in Notice 2025-57.

Under Notice 2025-57, an interest recipient is deemed to have satisfied its Section 6050AA reporting obligations for interest received in calendar year 2025:

“if the interest recipient makes a statement available to the individual indicating the total amount of interest received in calendar year 2025 on an SPVL.”

In T.D. 10054, the IRS formally confirmed that compliance with Notice 2025-57 fully satisfies a lender’s 2025 calendar year reporting obligations, providing total peace of mind for the initial transition period.

Proposed Regulations Reliance and Final Effective Date

The proposed regulations under REG-113515-25 were published on January 2, 2026. Taxpayers and interest recipients were permitted to rely on these proposed regulations pending the publication of the final regulations.

The final regulations under T.D. 10054 are approved as of July 27, 2026, and are scheduled to be published in the Federal Register on September 8, 2026.

Effective Date: The final regulations are effective on November 7, 2026, which is exactly “60 days after date of publication in the Federal Register.”
Applicability Dates: The substantive rules in Treas. Reg. § 1.163-16 apply to “taxable years beginning after December 31, 2024, and before January 1, 2029.” The information reporting rules under Treas. Reg. § 1.6050AA-1 apply to “calendar years beginning after December 31, 2024, and before January 1, 2029.”

Consequently, the final regulations apply retroactively to cover the entire duration of the statutory deduction. For the 2025 tax year, taxpayers claiming the QPVLI deduction must ensure they report the vehicle’s VIN on their Form 1040, as the statutory “VIN requirement” under Section 163(h)(4)(C)(iii) remains mandatory and cannot be waived by regulations. Taxpayers can determine if their vehicle had U.S. final assembly—a statutory prerequisite—by utilizing the National Highway Traffic Safety Administration (NHTSA) VIN Decoder website or checking the vehicle’s window sticker.

Prepared with assistance from Gemini Notebook.