New Year, New Regs
In keeping with tradition, the IRS released guidance on the new Qualified Passenger Vehicle Loan Interest (QPVLI) deduction on New Year’s Eve. The proposed regulations run over 95 pages and are available here. If you’re looking for an overview of the deduction, you can read our breakdown here.
These new regulations cover a lot of ground, clarifying what exactly they mean when they talk about lease financing, offering reassurance that a dealer taking the car on test drives doesn’t mean the taxpayer doesn’t meet the original use test, and explaining how interest on loans is treated when a vehicle is replaced (think lemon law).
Let’s Get Personal
We don’t have time to go into all the details here, so we’ll focus on the personal use requirement.
The code requires that the vehicle be purchased for personal use. With this wording, it could be inferred that the use would have to be exclusively personal. Under the proposed regulations, personal use must exceed 50%. If a taxpayer purchases a vehicle for a family member, the family member’s use will satisfy the requirement. If you buy your child a new car for their sweet sixteen, the interest on that loan may still be deductible.
The 50% personal-use determination is made at the time the debt is incurred, not on an ongoing basis. All the taxpayer has to do is determine that the vehicle will be used more than 50% for business at the time of purchase, making this test more about intent than outcome.
Let’s take a look at a couple of examples:
Robby purchases a new qualifying vehicle. At the time of purchase, he expects to use the vehicle 75% for personal use and 25% driving for rideshare apps. Because his expected use is more than 50% personal, interest paid on the vehicle loan may be deducted as QPVLI.
What if, instead, Robby expected to use the vehicle 40% for personal use and 60% for rideshare when he purchased it? The personal use does not meet the more than 50% requirement, so the interest must be allocated, and none of the personal-use interest is deductible.
Better living through allocation
Provided the taxpayer meets the personal-use standard (more than 50% expected personal use), all interest paid on the qualifying loan is deductible as QPVLI. Proposed regulations do not require allocating interest between personal and business use. The taxpayer may choose to allocate the independently deductible interest, but they don’t have to.
Let’s go back to Robby. Robby pays $1,000 qualifying interest in the year. If Robbie uses his vehicle 75% for personal use and 25% for business use, all interest paid is QPVLI. Robby may deduct $250 on his Schedule C and the remaining $750 on Schedule 1-A, or he may deduct the full $1,000 on Schedule 1-A.
Maximizing deductions
Taxpayers with large amounts of interest can maximize their interest deductions with allocations.
In the tax year, Robby pays $12,000 of qualifying interest. He uses his car 25% for business. $3,000 of the interest is independently deductible on Schedule C. Robby can choose to deduct the full $3,000 as business interest, and the remaining $9,000 on Schedule 1-A, or he can maximize his QPVLI deduction and claim $10,000 on Schedule 1-A and the remaining $2,000 on Schedule C.
While most taxpayers will want to take their deduction on Schedule C to reduce SE tax, this treatment is beneficial for employees who have unreimbursed business use of their vehicle. Since the regulations do not require the interest to be allocated, employees may be able to deduct interest for business use of their vehicles, despite the termination of the deduction for unreimbursed employee expenses.
The more guidance that is released, the more it becomes clear that navigating the OB3 is not for the faint of heart. We’ll be watching for regulations as they come, so check back for more updates.