PLANO, Texas— A new federal tax deduction allowing consumers to deduct interest on qualifying auto loans is being billed as a borrower benefit, but newly issued regulations from the U.S. Department of the Treasury and the Internal Revenue Service show the program will impose significant compliance and reporting obligations on credit unions and other auto lenders.
That’s the assessment of Brian Turner, president and chief economist with Meridian Economics, who said the rules governing the so-called auto loan interest deduction are “far more technical” than initially described and will require system and process changes for many finance providers, including credit unions active in indirect and direct auto lending.
Deduction Comes With Detailed Conditions
Brian Turner
Under the proposed regulations, interest is deductible only if the loan and vehicle meet strict criteria. The vehicle must weigh less than 14,000 pounds, be designed for public road use, be newly placed in service by the taxpayer, and have final assembly in the United States.
The loan must be structured as a first-lien security interest and finance only eligible costs tied to the vehicle purchase. In addition, taxpayers must report the vehicle identification number (VIN) on their return; failure to include the VIN disqualifies the deduction entirely.
Although the deduction applies for tax years 2025 through 2028 for loans originated after Dec. 31, 2024, Turner noted lenders may rely on the proposed rules now—meaning 2025 and 2026 originations should be treated operationally as if the regulations are already in effect.
New §6050AA Reporting Mirrors Mortgage Model
Perhaps most significant for credit unions, Turner noted, is a new annual information-reporting requirement under Section 6050AA of the tax code, similar to mortgage interest reporting.
Finance companies, banks, captive auto lenders, certain dealers and loan servicers must file an information return for each qualifying loan when $600 or more in interest is received in a calendar year. Turner said required data elements include:
- Borrower name, address and taxpayer identification number
- Vehicle year, make, model and VIN
- Principal balance as of Jan. 1
- Loan origination date
- Assignment date if the loan was purchased
Lenders must also provide borrowers with a written annual statement by Jan. 31.
For many credit unions, particularly those with high indirect volumes, capturing and reporting this level of vehicle and principal-balance detail on an annual basis represents a new operational lift. Turner said system updates and internal controls will likely be necessary, especially for institutions that currently do not store VINs or track beginning-of-year principal balances in reportable formats.
What Qualifies — And What Doesn’t
The rules narrowly define a “Specified Passenger Vehicle Loan.” Eligible financing can include the vehicle purchase price, sales tax, registration fees, extended warranties and service plans.
However, Turner explained, the deduction does not apply to:
- Negative equity rolled into a new loan (unless offset by a down payment)
- Cash-out proceeds
- Insurance products
- Non-vehicle personal property
Loans with mixed components must be allocated between qualifying and non-qualifying amounts. Refinanced loans retain eligibility only for the remaining principal tied to the original qualifying balance.
Turner also cautioned that demo vehicles could present complications in states where titling requirements may trigger “original use” before the consumer purchase. Lease-to-own models may not qualify if original use is deemed to begin with the lessor.
Personal-Use Test Is One-Time
To qualify, the borrower must reasonably expect at origination that the vehicle will be used more than 50% for personal purposes. This is a one-time test and does not require annual reassessment.
If interest could also be deducted as a business expense, taxpayers must choose one category; the same interest cannot be deducted twice. For borrowers near income-based phaseouts, allocating interest to business use may provide greater tax benefit.
Operational Changes Needed Now
Because penalties apply for inaccurate or incomplete filings, Turner said auto finance businesses—including credit unions—should begin preparing immediately. Recommended steps include:
- Updating systems to capture and store VINs, vehicle data and Jan. 1 principal balances
- Verifying loan structures are correctly classified as qualifying or non-qualifying
- Establishing procedures to designate a principal borrower when multiple names appear on a loan
- Incorporating mandated IRS language into annual borrower statements
- Reviewing payment-application methods to align with IRS accrual guidance
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