The Internal Revenue Service and the Department of the Treasury released a final rule on Sept. 8 outlining tax deductions for interest on qualifying new-vehicle auto loans, but dealers and lenders expressed disappointment over key limitations in the policy.
Rule Details and Income Restrictions
The deduction applies only to new vehicles manufactured in the United States, defined by final domestic assembly. A $10,000 annual cap limits the total deductible interest per borrower, with reduced benefits for those earning above $100,000 individually or $200,000 jointly. These income limits mean that taxpayers earning significantly more than the thresholds receive no deduction at all, effectively capping the policy’s reach to middle-income households.
Philip Bohi, general counsel for the American Financial Services Association, called the final rule “very disappointing” during a Sept. 14 interview. The association represents banks, captive finance companies, and dealer-based auto lenders.
Negative Equity Exclusion Sparks Industry Backlash
The most significant point of contention involves negative equity financing, where borrowers owe more on a trade-in than its value. The IRS explicitly excluded interest payments on such amounts from the deduction, despite industry requests to include them. This exclusion means that a substantial portion of buyers who rely on negative equity financing to afford a new vehicle cannot benefit from the tax deduction on the portion of their loan covering the negative equity.
Nearly 30 percent of new-vehicle purchases in Q2 2026 included negative equity, averaging $6,884 per transaction according to Edmunds data. Greg Evans of the National Automobile Dealers Association argued in a Feb. 2 filing that “for many consumers, there would be no purchase without this arrangement.”
The Treasury Department and IRS rejected the request in their Sept. 8 Federal Register announcement, stating they would not adopt the proposed changes. This ruling effectively bars lenders from offering the same tax incentives on negative equity as they do on the vehicle’s purchase price, creating a disparity in the financial benefits available to buyers. Having to keep track of how much interest is paid specifically toward negative equity is a new requirement on lenders, said Bohi of AFSA. “There’s never been a reason to break any of this stuff out,” he said.
Limited Adoption Despite Availability
The deduction originated from the One Big Beautiful Bill Act signed July 4, 2025, but it wasn’t published in much detail until Dec. 31, 2025. Only about 8.6 percent of 2025 new-vehicle buyers claimed the benefit, with 1.4 million filers according to Treasury data from July 2, 2026. Out of about 16.3 million new-vehicle sales in 2025, 1.4 million represents about 8.6% of new-vehicle transactions.