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<title>Federal Register, Volume 91 Issue 1 (Friday, January 2, 2026)</title>
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[Federal Register Volume 91, Number 1 (Friday, January 2, 2026)]
[Proposed Rules]
[Pages 67-93]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-24154]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 91, No. 1 / Friday, January 2, 2026 /
Proposed Rules
[[Page 67]]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[REG-113515-25]
RIN 1545-BR75
Car Loan Interest Deduction
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations regarding the
deduction for certain taxpayers for an amount up to $10,000 of
qualified passenger vehicle loan interest. This document also contains
proposed regulations regarding new information reporting requirements
for certain persons who, in a trade or business, receive from any
individual interest aggregating $600 or more for any calendar year on a
specified passenger vehicle loan, including applicable penalties for
failures to file information returns or furnish payee statements as
required. The proposed regulations would affect taxpayers that may
deduct qualified passenger vehicle loan interest, and also persons
subject to these information reporting requirements. This document also
provides notice of a public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by February 2,
2026. The public hearing is being held on February 24, 2026, at 10 a.m.
ET. Requests to speak and outlines of topics to be discussed at the
public hearing must be received by February 2, 2026. If no outlines are
received by February 2, 2026, the public hearing will be cancelled.
Requests to attend the public hearing must be received by 5 p.m. ET on
February 20, 2026.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="http://www.regulations.gov">www.regulations.gov</a> (indicate IRS and REG-113515-
25) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The Department of the Treasury (Treasury Department) and
the IRS will publish for public availability any comments submitted
electronically and comments submitted on paper to its public docket.
Send hard copy submissions to: CC:PA:01:PR (REG-113515-25), Room 5503,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Riston Escher of the Office of Associate Chief Counsel (Income Tax &
Accounting) at (202) 317-7003; concerning submissions of comments or
the public hearing, please contact Publications and Regulations Section
at (202) 317-6901 (not toll-free numbers) or by email at
<a href="/cdn-cgi/l/email-protection#235356414f4a404b4642514a4d4450634a51500d444c55"><span class="__cf_email__" data-cfemail="35454057595c565d5054475c5b5246755c47461b525a43">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Authority
This notice of proposed rulemaking contains proposed amendments
that would add new regulations to the Income Tax Regulations (26 CFR
part 1) under sections 163 and 6050AA of the Internal Revenue Code
(Code), as amended and enacted, respectively, by section 70203(a) and
(c)(1) of Public Law 119-21, 139 Stat. 72, 176-179 (July 4, 2025),
commonly known as the One, Big, Beautiful Bill Act (OBBBA), related to
the allowance of a Federal income tax deduction under section 163(a)
and (h)(4) for qualified passenger vehicle loan interest (QPVLI) and
certain information reporting requirements under section 6050AA for
persons receiving certain interest on a specified passenger vehicle
loan (SPVL). This notice of proposed rulemaking also contains proposed
amendments to the Procedure and Administration Regulations (26 CFR part
301) relating to electronic filing of returns under section 6011 of the
Code, and penalties under section 6721 of the Code for failures to file
information returns and under section 6722 of the Code for failures to
furnish payee statements.
The proposed regulations are issued under the authority of section
7805(a) of the Code, which authorizes the Secretary of the Treasury or
the Secretary's delegate (Secretary) to prescribe all needful rules and
regulations for the enforcement of the Code including all rules and
regulations as may be necessary by reason of any alteration of law in
relation to internal revenue. The proposed regulations under section
6050AA are also issued under the authority of section 6050AA(e), which
authorizes the Secretary to issue such regulations or other guidance as
may be necessary or appropriate to carry out the purposes of section
6050AA, including regulations or other guidance to prevent the
duplicate reporting of information under section 6050AA. The proposed
regulations under section 6011 are also issued under the authority of
section 6011(e), which authorizes the Secretary to prescribe
regulations that require taxpayers to electronically file returns,
including information returns, if the taxpayer is required to file at
least 10 returns of any type during a calendar year.
Background
Section 70203(a) of the OBBBA amended section 163(h) (relating to
the disallowance of any deduction for personal interest) by inserting a
new paragraph (4) to provide an exception for QPVLI. Additionally,
section 70203(b) of the OBBBA amended section 63(b) of the Code by
inserting a new paragraph (7) to allow this deduction for taxpayers
that do not itemize their deductions. Further, section 70203(c) of the
OBBBA added new section 6050AA to the Code to require returns relating
to applicable passenger vehicle loan interest received in a trade or
business from individuals. The amendments made by section 70203 of the
OBBBA apply to indebtedness incurred after December 31, 2024. The new
allowance of a deduction for QPVLI under section 163(a) and (h)(4)
applies solely to taxable years beginning after December 31, 2024, and
before January 1, 2029. New section 6050AA provides that no information
return is required under section 6050AA for any period to which new
section 163(h)(4) does not apply.
I. Section 163
Section 163(a) allows a deduction for all interest paid or accrued
within the
[[Page 68]]
taxable year on indebtedness. Section 163(h) generally disallows a
deduction for personal interest. Section 163(h)(1) provides that a
taxpayer other than a corporation cannot take a deduction for personal
interest paid or accrued during the taxable year under chapter 1 of the
Code. Section 163(h)(2) defines ``personal interest'' as any interest
deductible under chapter 1 other than (a) interest paid or accrued on
indebtedness properly allocable to the conduct of a trade or business
(other than the trade or business of performing services as an
employee), (b) investment interest, (c) interest taken into account
under section 469 of the Code in computing income or loss from a
passive activity, (d) qualified residence interest, (e) interest
payable under section 6601 of the Code on any unpaid portion of the tax
imposed by section 2001 of the Code for the period during which an
extension of time for payment of such tax is in effect under section
6163 of the Code, and (f) any interest allowable as a deduction under
section 221 of the Code.
As added by the OBBBA, new section 163(h)(4)(A) provides that in
the case of taxable years beginning after December 31, 2024, and before
January 1, 2029, personal interest does not include QPVLI. As a result,
a deduction for QPVLI is allowable under section 163(a) for taxable
years beginning after December 31, 2024, and before January 1, 2029.
Section 163(h)(4)(B)(i) provides that ``QPVLI'' means 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, subject to certain enumerated exceptions in section
163(h)(4)(B)(ii). Section 163(h)(4)(C) provides limitations on the
amount of QPVLI that a taxpayer can deduct during a taxable year.
Section 163(h)(4)(D) defines an ``APV'' as a vehicle that satisfies the
requirements of section 163(h)(4)(D)(i) through (vi) but excludes from
the definition any vehicle the final assembly of which did not occur
within the United States. Section 163(h)(4)(E) provides the definition
of ``final assembly'' and special rules on the treatment of a
refinancing and related party indebtedness.
II. Section 63(b)(7)
Section 63 defines ``taxable income'' for purposes of subtitle A of
the Code (subtitle A). Section 63(a) provides the general rule that,
except as provided in section 63(b), for purposes of subtitle A, the
term ``taxable income'' means gross income minus the deductions allowed
by chapter 1 (other than the standard deduction). Section 63(b)
provides that, in the case of an individual who does not elect to
itemize the individual's deductions for the taxable year, for purposes
of subtitle A, the term taxable income means ``adjusted gross income''
(as defined in section 62 of the Code), minus the deductions enumerated
in section 63(b)(1) through (7). As amended by the OBBBA, 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.
III. Section 6050AA
New section 6050AA(a) provides that 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, must file an information return reporting the receipt of
interest. Section 6050AA(b) provides that the information return filed
by the recipient of such interest (interest recipient) must be in the
form prescribed by the Secretary and must contain: (A) the name and
address of the individual from whom such interest was received, (B) the
amount of such interest received for the calendar year, (C) the amount
of outstanding principal on the SPVL as of the beginning of such
calendar year, (D) the date of origination of that loan, (E) the year,
make, model, and vehicle identification number (VIN) of the APV that
secures that loan (or any other description of that vehicle as the
Secretary may prescribe), and (F) any other information as the
Secretary may prescribe.
Section 6050AA(c) provides that every person required to make an
information return under section 6050AA(a) must also furnish to each
individual whose name is required to be included in the return a
written statement showing the name, address, and phone number of the
information contact of the interest recipient, and the information
required to be included in the information return under section
6050AA(b)(2)(B) through (F).
Section 6050AA(e) authorizes the Secretary to issue regulations or
guidance necessary to carry out the purposes of section 6050AA,
including regulations or other guidance to prevent duplicate reporting.
IV. Section 6011 and Electronic Filing of Information Returns
Section 6011(e) authorizes the Secretary to prescribe regulations
providing standards for determining which returns must be filed on
magnetic media or in other machine-readable form. Section 6011(e)(5)
authorizes the Secretary to prescribe regulations that require
taxpayers to electronically file returns, including information
returns, if the taxpayer is required to file at least 10 returns of any
type during a calendar year.
V. Penalties Under Sections 6721 and 6722
Section 6721 imposes a penalty for any failure to file an
information return on or before the required filing date, and for any
failure to include all the information required to be shown on a return
or the inclusion of incorrect information. Section 6722 imposes a
penalty for any failure to furnish a payee statement on or before the
required furnishing date to the person to whom such statement is
required to be furnished and for any failure to include all the
information required to be shown on a payee statement or the inclusion
of incorrect information.
Section 70203(c)(2)(A) of the OBBBA amended section 6724(d)(1) to
add information reporting requirements under section 6050AA--regarding
returns relating to QPVLI received in a trade or business from
individuals--to the definition of ``information return.'' Section
70203(c)(2)(B) of the OBBBA similarly amended the definition of ``payee
statement'' in section 6724(d)(2). As a result of these amendments,
penalties under sections 6721 and 6722 may be imposed on interest
recipients that fail to file correct information returns and payee
statements under section 6050AA.
On October 21, 2025, the IRS released Notice 2025-57, 2025-45
I.R.B. 692, to provide transitional guidance on the information
reporting requirements under section 6050AA. Notice 2025-57 provides
that an interest recipient will be deemed to have satisfied the
reporting obligations under section 6050AA for interest on SPVLs
received in 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.
Explanation of Provisions
I. Explanation of Proposed Sec. 1.163-16
A. QPVLI Generally
Section 163(h)(4)(B)(i) provides the general rule that QPVLI means
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
[[Page 69]]
is secured by a first lien on, an APV for personal use. Proposed Sec.
1.163-16(c)(1) would provide that interest is QPVLI only if the
interest is paid or accrued on an SPVL that is secured by a first lien
on the purchased APV at the time the taxpayer pays or accrues interest
on that SPVL. A lender's release of a lien typically occurs following
the borrower's final payment on the related indebtedness. Thus, at the
time of the final payment, an SPVL would typically still be secured by
a lien on the purchased APV. See parts I.C (Interest paid or accrued),
I.E.1 (SPVLs Generally), and I.D (QPVLI exceptions) of this Explanation
of Provisions.
B. Taxpayers That May Deduct QPVLI
Section 163(h)(4)(B)(i) provides that QPVLI is interest paid or
accrued on indebtedness incurred by the taxpayer for the purchase of an
APV for personal use.
Proposed Sec. 1.163-16(a)(2)(i) would provide that only
individuals, decedents' estates, and non-grantor trusts may deduct
QPVLI. This is because only those taxpayers could be considered to have
purchased an APV for personal use as described in part I.H.2 of this
Explanation of Provisions (Types of Taxpayers that May Satisfy the
Personal Use Requirement).
Under existing rules (for example, Sec. 301.7701-3(b)), an entity
may be disregarded as an entity separate from its owner for Federal tax
purposes. Accordingly, for Federal income tax purposes (including for
purposes of section 163(h)(4)), activities of a disregarded entity are
treated as the activities of the owner. Additionally, a grantor or
other person treated as owning any portion of a trust under sections
671 through 679 of the Code (a grantor trust) is treated as the owner
of the trust property for Federal income tax purposes. See Revenue
Ruling 85-13 (1985-1 C.B. 184). For example, if a grantor trust
acquires an APV and incurs a secured loan for its purchase, the grantor
trust's deemed owner is treated as the owner of the APV and the obligor
of the loan, and 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. In this case, the modified adjusted gross income phaseout
(as would be provided in proposed Sec. 1.163-16(h)(2)) is determined
based upon the modified adjusted gross income of the deemed owner of
the grantor trust, rather than the modified adjusted gross income of
the grantor trust or any other person.
Thus, similar to the deduction for qualified residence interest
under section 163(h)(3), the proposed regulations would permit QPVLI to
be deducted by an individual, decedent's estate, or non-grantor trust,
including with respect to a grantor trust or disregarded entity deemed
owned by the individual, decedent's estate, or non-grantor trust.
Section 63(b)(7) provides that the deduction for QPVLI is allowed
for taxpayers who do not itemize deductions. Proposed Sec. 1.163-
16(a)(2)(ii) would clarify that the deduction for QPVLI may be taken by
taxpayers who itemize deductions and taxpayers who take the standard
deduction. For taxpayers who itemize deductions, the deduction is
available under the general rule of section 63(a). For taxpayers who
take the standard deduction, the deduction is available under section
63(b)(7).
C. Interest Paid or Accrued
Proposed Sec. 1.163-16(c)(2)(i) would provide that interest on an
SPVL accrues on a daily basis over the term of the SPVL, consistent
with the accrual of interest on other debt instruments. The amount of
QPVLI that is deductible by a taxpayer for the taxable year is
determined by the taxpayer's overall method of accounting for Federal
income tax purposes (either the cash receipts and disbursements method
or an accrual method) or an applicable special method of accounting.
For purposes of section 163(h)(4), QPVLI includes all interest payable
with respect to the amount financed under an SPVL.
Proposed Sec. 1.163-16(c)(2)(ii) would provide that a payment on
an SPVL is treated first as a payment of interest to the extent
interest has accrued and remains unpaid on the SPVL as of the date the
payment is due, and second, to the extent of any excess, as a payment
of principal. Proposed Sec. 1.163-16(c)(2)(ii) would also make clear
that, consistent with the foregoing, a simple interest calculation may
be used to determine the amount of interest that has accrued and
remains unpaid on an SPVL when a payment is made. Under this simple
interest calculation, interest accrues daily over the term of the SPVL
based on the outstanding principal balance and the Annual Percentage
Rate (APR) or stated interest rate provided in the retail installment
sales contract or other contract evidencing the SPVL.
D. QPVLI Exceptions
1. In General
As discussed in part I.A of this Explanation of Provisions (QPVLI
Generally), proposed Sec. 1.163-16(c)(1) would provide that interest
is QPVLI only if the interest is paid or accrued on an SPVL that is
secured by a first lien on the purchased APV at the time the taxpayer
pays or accrues interest on that SPVL.
Consistent with section 163(h)(4)(B)(ii), proposed Sec. 1.163-
16(c)(4) would provide that QPVLI does not include amounts paid or
accrued on: (i) a loan to finance fleet sales; (ii) a loan incurred for
the purchase of a commercial vehicle that is not used for personal
purposes; (iii) any lease financing; (iv) a loan to finance the
purchase of a vehicle with a salvage title; or (v) a loan to finance
the purchase of a vehicle intended to be used for scrap or parts.
2. Non-Purchase Transactions
Proposed Sec. 1.163-16(b)(6) would provide that the term ``lease
financing'' means a transaction that is not a purchase of an APV, and
under which a taxpayer has usage rights with respect to an APV but is
not considered the owner of the APV under State or other applicable
law. As stated in part I.F of this Explanation of Provisions (Purchase
of the APV), proposed Sec. 1.163-16(b)(11) would provide that
``purchase'' means an acquisition that is both (i) an acquisition of a
vehicle for Federal income tax purposes and (ii) the acquisition of the
title of the vehicle for purposes of State or other applicable law.
Accordingly, because under proposed Sec. 1.163-16(b)(6) a lease
financing does not involve a purchase of an APV, it would not be
considered an SPVL, and QPVLI would not include any amounts paid or
accrued with respect to a lease financing, including any amounts
payable under the lease financing that are attributable to the time
value of money.
A transaction that is a lease financing under State or other
applicable law would not be a purchase within the meaning of section
163(h)(4)(B)(i) and proposed Sec. 1.163-16(b)(6) and (11), even if the
transaction is properly viewed as a sale for Federal income tax
purposes. Conversely, a transaction that is a purchase of an APV under
State or other applicable law that is properly viewed as a lease for
Federal income tax purposes also would not be a purchase within the
meaning of section 163(h)(4)(B)(i) and proposed Sec. 1.163-16(b)(11).
[[Page 70]]
Proposed Sec. 1.163-16(c)(6)(i) would provide an example that
illustrates the application of proposed Sec. 1.163-16(c)(1) and (4) to
a non-purchase transaction.
3. Lien on APV Substitutes
Proposed Sec. 1.163-16(c)(3)(ii) would provide an exception to the
proposed general rule in proposed Sec. 1.163-16(c)(1) and (c)(3)(i)
that interest is QPVLI only if the interest is paid or accrued on an
SPVL that is secured by a first lien on the purchased APV at the time
the taxpayer pays or accrues interest on that SPVL. This proposed
exception would permit the substitution of collateral on the SPVL in
limited circumstances. Under this proposed exception, if an SPVL is
secured by a first lien on an APV that is replaced with a substitute
APV due to an unforeseen intervening event, and the lien is transferred
to that substitute APV under the loan documentation terms, the
indebtedness will continue to be treated as an SPVL. Unforeseen
intervening events would include a defective APV required to be
replaced under State or other applicable lemon law or an APV that is
required to be replaced due to an insurance product.
This proposed exception would be limited to substitute vehicles for
which original use commences with the taxpayer, and that otherwise meet
the requirements to be an APV. Furthermore, this proposed exception
would be intended to apply in situations in which the existing SPVL
continues without change other than the substitution of the collateral
for the SPVL, as if the unforeseen intervening event did not occur. If
instead the lender in that situation treats the original SPVL as being
satisfied and new indebtedness as being issued to the taxpayer for the
substitute vehicle, the generally applicable rules would apply for
determining if this new indebtedness for the vehicle is an SPVL.
Proposed Sec. 1.163-16(c)(6)(ii) would provide an example that
illustrates the application of proposed Sec. 1.163-16(c)(3).
4. Requirement To Report the VIN
Consistent with section 163(h)(4)(B)(iii), proposed Sec. 1.163-
16(c)(5) would provide that interest paid or accrued by a taxpayer
during the taxable year on an SPVL is not deductible as QPVLI unless
the taxpayer reports the VIN of the purchased APV on the Schedule 1-A
(or successor) or other relevant form specified by the Secretary.
Proposed Sec. 1.163-16(b)(16) would provide that ``VIN'' means the
series of Arabic numbers and Roman letters that is assigned to a motor
vehicle for identification purposes under 49 CFR 565.13.
E. Specified Passenger Vehicle Loan (SPVL)
1. SPVLs Generally
Section 163(h)(4)(B)(i) provides that interest is QPVLI only if it
is paid or accrued on indebtedness that is incurred by the taxpayer
after December 31, 2024, for the purchase of, and that is secured by a
first lien on, an APV for personal use. Because section 163(h)(4)(B)(i)
does not use a specific term for this indebtedness, proposed Sec.
1.163-16(b)(15) refers to this indebtedness as a ``specified passenger
vehicle loan'' or an ``SPVL,'' the term used in section 6050AA to
reference this indebtedness.
Proposed Sec. 1.163-16(b)(14) would provide that ``secured by a
first lien'' means a valid and enforceable security interest in an APV
under State or other applicable law with priority ahead of all other
security interests, other than tax liens or other similar security
interests that may be given higher priority at a later date following
the date of purchase and only in limited circumstances. This exception
would be intended to clarify that so-called springing liens that result
due to the operation of State or other applicable law and that may be
given a higher priority at a later date following the date of purchase,
such as a tax lien arising due to the non-payment of State property
taxes, do not prevent the APV from being secured by a first lien.
Section 163(h)(4)(E)(iii) provides that indebtedness between the
taxpayer and a related party (within the meaning of section 267(b) or
707(b)(1) of the Code) is not an SPVL.
2. The SPVL Must Be Incurred for the Purchase of an APV
An APV may be sold under loan documentation referred to as a
``motor vehicle retail installment sales contract''. A typical motor
vehicle retail installment sales contract indicates the total amount to
be paid as part of the purchase transaction for the APV, which includes
the purchase price of the vehicle and other fees and charges for
property and services that are part of the purchase transaction. The
total amount to be paid for the purchase transaction takes into account
the value of any trade-in vehicle and any amounts paid by a taxpayer at
the time of the purchase transaction for an APV, such as a down
payment. In certain cases, amounts representing debt on a vehicle
traded in as part of the purchase transaction for the APV in excess of
the value of the vehicle (so-called ``negative equity'') are rolled
into the financing for the purchase of the APV and included in the
total amount to be paid as part of the purchase transaction for the
APV.
The ``amount financed'' consists of the total amount to be paid as
part of the purchase transaction for the APV, including any negative
equity, reduced by the value of any trade-in vehicle and any down
payment. Under the typical terms of the contract, the APR is the cost
of the buyer's credit as a yearly rate. The finance charge stated in
the contract, which is the total dollar amount the credit will cost the
buyer, is determined based on the APR, the amount financed, and the
period over which the buyer will make payments.
Proposed Sec. 1.163-16(d)(2)(i) would provide that indebtedness
qualifies as an SPVL 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 (for example, vehicle service plans,
extended warranties, sales taxes, and vehicle-related fees). For this
purpose, whether an item or amount is customarily financed in an APV
purchase transaction would be determined on an industry-wide basis, and
not by reference to the financing terms of a particular financing
entity.
Proposed Sec. 1.163-16(d)(2)(ii) would provide that to the extent
any indebtedness is not described in proposed Sec. 1.163-16(d)(2)(i),
this indebtedness is not incurred by a taxpayer for the purchase of an
APV, even if it is incurred as part of a purchase transaction for an
APV, and, therefore, this indebtedness is not an SPVL. For example, an
amount representing negative equity under an existing loan on a trade-
in vehicle is not described in proposed Sec. 1.163-16(d)(2)(i) because
such negative equity is not an item or amount directly related to the
purchased APV.
In addition, indebtedness is not incurred by a taxpayer for the
purchase of an APV to the extent the indebtedness is 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). Indebtedness is also not incurred by a taxpayer for
the purchase of an APV to the extent the indebtedness relates to cash
proceeds that the taxpayer receives from the lender.
In general, under proposed Sec. 1.163-16(d)(2)(iii)(A), if a
taxpayer incurs indebtedness attributable to more than the purchase of
an APV and any items
[[Page 71]]
or amounts customarily financed with the purchase of the APV that are
directly related to the purchased APV, the portion of the indebtedness
attributable to this excess amount (nonqualifying indebtedness) would
not be an SPVL. Accordingly, none of the interest attributable to this
portion of the indebtedness would be deductible as QPVLI. Proposed
Sec. 1.163-16(d)(2)(iii)(B) would provide that for purposes of
determining the portion of the indebtedness that constitutes
nonqualifying indebtedness, 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
or for other items customarily financed in an APV purchase transaction
and that directly relate to the purchase of the APV. This proposed rule
would reduce the amount of indebtedness that otherwise would not
qualify as an SPVL to the extent of any down payment or other
consideration supplied by the taxpayer. For example, if a taxpayer
incurred indebtedness totaling $50,000 to purchase an APV, made a down
payment of $4,000, and traded in a car with $6,000 of negative equity,
and all other amounts incurred by the taxpayer were for the purchase of
the APV or for other items or amounts customarily financed in an APV
purchase transaction that directly relate to the purchased APV, then
$48,000 of the indebtedness would qualify as an SPVL and only $2,000
would not qualify as an SPVL.
Proposed Sec. 1.163-16(d)(6)(i) and (ii) provide examples that
would illustrate the application of proposed Sec. 1.163-16(d)(2)(i)
through (iii).
3. Refinanced SPVLs
Section 163(h)(4)(E)(ii) generally provides that a new loan
resulting from refinancing an SPVL is an SPVL if the new loan is
secured by a first lien on the APV with respect to which the refinanced
SPVL was incurred, but only to the extent the amount of the new loan
does not exceed the amount of the refinanced SPVL.
Proposed Sec. 1.163-16(d)(4) would provide this rule and clarify
that the amount of the new loan that is an SPVL is limited to the
outstanding balance of the refinanced SPVL as of the date of the
refinancing. Consistent with proposed Sec. 1.163-16(d)(5)(i), which
would provide that the SPVL would have to be originally incurred by the
taxpayer, proposed Sec. 1.163-16(d)(4) would provide that, if there is
a change in obligor as part of the refinancing, the new loan is not an
SPVL with regard to any obligor other than the original obligor unless
the refinancing is in connection with a change in obligor by reason of
the obligor's death within the meaning of proposed Sec. 1.163-
16(d)(5)(ii). See part I.E.4 of this Explanation of Provisions (SPVL
Must Be Incurred by the Taxpayer).
Proposed Sec. 1.163-16(d)(6)(iii) would provide an example that
illustrates the application of proposed Sec. 1.163-16(d)(4).
4. The SPVL Must Be Incurred by the Taxpayer
Proposed Sec. 1.163-16(d)(5) would provide additional guidance on
the requirement in section 163(h)(4)(B)(i) that indebtedness be
``incurred by the taxpayer'' in order to qualify as an SPVL. Generally,
section 163(h)(4) provides an exception to the disallowance of a
deduction for personal interest in section 163(h)(1) that applies to
certain taxpayers that incur SPVLs. Section 163(h)(4) does not provide
that indebtedness owed by a taxpayer other than the taxpayer that
originally incurred the indebtedness may qualify as an SPVL.
Accordingly, proposed Sec. 1.163-16(d)(5)(i) would provide a
proposed general rule that indebtedness is an SPVL only if that
indebtedness was originally incurred by the taxpayer. For example, if
individual A incurs an SPVL and subsequently is replaced by individual
B as the obligor on the indebtedness, the indebtedness is no longer an
SPVL.
However, the proposed regulations would contain an exception to
this proposed general rule for a change in obligor by reason of the
obligor's death. In the limited circumstance of the death of the
original obligor, this rule would treat the obligor succeeding to the
decedent's interest as stepping into the shoes of the original obligor
for purposes of section 163(h)(4). Thus, proposed Sec. 1.163-
16(d)(5)(ii)(A) would provide that if a change in obligor on an SPVL
occurs by reason of the death of the obligor, then the indebtedness
remains an SPVL with respect to the new obligor.
Proposed Sec. 1.163-16(d)(5)(ii)(B) would provide that a change in
obligor by reason of death as described in proposed Sec. 1.163-
16(d)(5)(ii) would include a change in obligor (whether through a
modification of the existing indebtedness or a refinancing) by reason
of the following: the succession to ownership of an APV subject to an
SPVL by the deceased obligor's estate, a surviving joint owner of the
APV, or the surviving beneficiary designated by contract, a transfer on
death provision, or by operation of law; and a distribution of an APV
subject to an SPVL by a deceased obligor's estate to a legatee or heir
or by a trust that is made to a trust beneficiary by reason of death.
Proposed Sec. 1.163-16(d)(5)(ii)(C) would provide that a change in
obligor by reason of death as described in proposed Sec. 1.163-
16(d)(5)(ii) would not include changes in the obligor resulting from
the following: a sale, exchange, or other disposition of an APV by a
decedent's estate or trust, other than certain distributions described
in proposed Sec. 1.163-16(d)(5)(ii)(B); or any disposition of an APV
by an individual who received the APV by reason of death (unless that
individual also dies and the change in obligor is described in proposed
Sec. 1.163-16(d)(5)(ii)(B)).
For example, assume D, an individual, incurs indebtedness that
qualifies as an SPVL. Subsequently, D dies and D's APV, subject to the
SPVL, then belongs to D's estate. Sometime thereafter, D's estate
distributes the APV, subject to the SPVL, to H, a residuary legatee
under D's will. Subsequently, H gifts the APV, subject to the SPVL, to
G, an individual. Under proposed Sec. 1.163-16(d)(5)(ii) the
indebtedness remains an SPVL with respect to D, D's estate, and H,
during such time as each person held the APV subject to the
indebtedness, because each of these parties is the obligor on the
indebtedness due to the death of D (an obligor of an SPVL).
Accordingly, D, D's estate, and H each may deduct the amount of
interest that each of D, D's estate, and H, respectively, paid or
accrued on the SPVL as QPVLI, subject to the requirements of section
163(h)(4)(C) and proposed Sec. 1.163-16(h). For example, it may be the
case that D and H cannot deduct the interest because their respective
modified adjusted gross incomes exceed the limits imposed by section
163(h)(4)(C)(ii), but that D's estate is able to deduct the interest.
However, the indebtedness is not an SPVL with respect to G because G
did not originally incur the indebtedness or become the obligor on the
indebtedness by reason of D's death.
F. Purchase of the APV
Section 163(h)(4)(B)(i) requires that the indebtedness incurred by
the taxpayer be for the purchase of an APV. Proposed Sec. 1.163-
16(b)(11) would provide that ``purchase'' means an acquisition that is
both an acquisition of a vehicle for Federal income tax purposes and
the acquisition of the title of the vehicle for purposes of State or
other applicable law. A purchase results
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in the taxpayer being listed as the owner on the title or registration
of the APV under State or other applicable law, with the lender listed
on the title as the first lienholder. The fact that a lender may
physically hold this title until the indebtedness is repaid would not
affect whether the transaction is considered a purchase.
G. Applicable Passenger Vehicle (APV)
1. In General
Section 163(h)(4)(D) defines APV as meaning any vehicle: (i) the
original use of which commences with the taxpayer; (ii) that is
manufactured primarily for use on public streets, roads, and highways
(not including a vehicle operated exclusively on a rail or rails);
(iii) that has at least 2 wheels; (iv) that is a car, minivan, van,
sport utility vehicle, pickup truck, or motorcycle; (v) that is treated
as a motor vehicle for purposes of title II of the Clean Air Act; and
(vi) that has a gross vehicle weight rating of less than 14,000 pounds.
Section 163(h)(4)(D) also provides that the term APV does not include
any vehicle the final assembly of which did not occur within the United
States.
Proposed Sec. 1.163-16(e)(1) would provide that a vehicle is an
APV only if it satisfies the requirements set forth in section
163(h)(4)(D). Proposed Sec. 1.163-16(b)(13) would define car, minivan,
van, sport utility vehicle, pickup truck, and motorcycle by reference
to existing, well-established vehicle classification standards used by
the Environmental Protection Agency (EPA), consistent with the
reference in section 163(h)(4)(D)(v) to the Clean Air Act that the EPA
administers. Proposed Sec. 1.163-16(e)(2) and (3), respectively, would
provide rules for determining whether original use commences with the
taxpayer and final assembly occurred in the United States.
2. Original Use
Proposed Sec. 1.163-16(e)(2)(i) would provide that original use
commences with the first person that takes delivery of a vehicle after
the vehicle is sold, registered, or titled. In the case of a dealer,
proposed Sec. 1.163-16(e)(2)(i) would also provide that original use
of a vehicle does not commence with the dealer unless the dealer
registers or titles the vehicle to itself (for example, in the case of
certain demonstrator vehicles or loaner vehicles). Proposed Sec.
1.163-16(e)(2)(i) would recognize that dealers may operate vehicles
prior to the sale to retail purchasers in a manner that does not
require the vehicle to be registered or titled under State or other
applicable law, and that operation of the vehicle in this manner would
not result in original use commencing with the dealer. For example, if
a dealer uses a vehicle for test drives or as a demonstrator vehicle,
and State or other applicable law does not require the dealer to
register or title the vehicle, original use of that vehicle would not
commence with the dealer. In this case, a subsequent retail purchaser
of that vehicle could satisfy the original use requirement for the
vehicle. On the other hand, dealer operation that requires the vehicle
to be registered or titled under State or other applicable law would
cause original use to commence with the dealer. For example, if a
dealer uses a vehicle as a courtesy car loaned to customers in
connection with servicing or the repair of vehicles and State or other
applicable law requires the dealer to register or title the vehicle,
original use of that vehicle would commence with the dealer. In this
case, a subsequent retail purchaser of that vehicle cannot satisfy the
original use requirement for the vehicle, and therefore the vehicle
would not be an APV when purchased by the retail purchaser. Although a
dealer's requirement to register or title vehicles may vary under State
or other applicable law, this proposed standard would be
straightforward for taxpayers to apply and administrable for the IRS.
The proposed approach to original use for retail purchasers
recognizes that prior use of a vehicle by the dealer that would prevent
the vehicle from being sold as a new vehicle under the associated loan
documentation to a retail purchaser generally would suffice to cause
the original use to commence with the dealer. Accordingly, under
proposed Sec. 1.163-16(e)(2)(i), for retail purchasers that incur
indebtedness to purchase a vehicle, original use would commence with
that purchaser only if the loan documentation treats the vehicle as a
new vehicle.
Proposed Sec. 1.163-16(e)(2)(ii) would provide an exception to the
original use requirement. Under this exception, if a retail purchaser
returns a vehicle within 30 days after the purchaser took delivery of
that vehicle, the original use of that vehicle would not be considered
to have commenced with that purchaser. In this case, the original use
of that vehicle may commence with a subsequent retail purchaser of that
vehicle if that subsequent purchaser's loan documentation treats the
vehicle as a new vehicle. The Treasury Department and the IRS
understand that dealers may have return policies that range from
several days up to 30 days, and these proposed rules are intended to
reflect industry practice.
Proposed Sec. 1.163-16(e)(2)(iii) would provide examples that
illustrate the application of proposed Sec. 1.163-16(e)(2)(i) and
(ii), including the application of the proposed original use
requirement to dealer demonstrator vehicles, a vehicle that was
previously the subject of a cancelled sale, a vehicle that was
previously leased and was purchased by the lessee after the lease was
terminated, and a vehicle that was previously returned by a retail
purchaser.
3. Final Assembly
Section 163(h)(4)(D) provides that an APV does not include any
vehicle the final assembly of which did not occur within the United
States. The final assembly point is listed on the vehicle information
label attached to each vehicle on a dealer's premises. Proposed Sec.
1.163-16(e)(3) would provide that, to establish that final assembly
occurred within the United States, the taxpayer may rely on (1) the
vehicle's plant of manufacture as reported in the VIN under 49 CFR 565;
or (2) the final assembly point reported on the label affixed to the
vehicle as described in 49 CFR 583.5(a)(3). Taxpayers can determine
whether the vehicle's plant of manufacture is located in the United
States by following the instructions on the National Highway Traffic
Safety Administration (NHTSA) VIN Decoder website: <a href="https://www.nhtsa.gov/vin-decoder">https://www.nhtsa.gov/vin-decoder</a>.
These proposed reliance standards are intended to allow taxpayers
to determine whether a vehicle meets the final assembly requirement in
a straightforward manner, such that a taxpayer may more clearly make
informed purchase decisions that consider the potential applicability
of section 163(h)(4) at the time of the purchase of a vehicle.
H. Personal Use of the APV
1. Definition of Personal Use
The definition of QPVLI in section 163(h)(4)(B) requires that the
indebtedness is incurred by the taxpayer for the purchase of an APV for
personal use, as contrasted with the purchase of a vehicle for use in a
trade or business, for investment, or for other non-personal use.
Accordingly, proposed Sec. 1.163-16(b)(10) would define ``personal
use'' to mean use by an individual other than in any trade or business
(except for use in the trade or business of performing services as an
employee), or for the production of income. Costs of commuting between
an individual's home and the individual's main or regular place of work
are
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personal expenses. See Revenue Ruling 99-7 (1999-1 C.B. 361) and Sec.
1.262-1(b)(5).
2. Types of Taxpayers That May Satisfy the Personal Use Requirement
Inherent in section 163(h)(4)(B)(i) of the Code and the proposed
definition of personal use in proposed Sec. 1.163-16(b)(10) is that
individuals may satisfy the personal use requirement. For example, an
individual that incurs indebtedness for the purchase of an APV may
satisfy the personal use requirement with the individual's own use of
the car.
Ordinary trusts are generally formed for the purpose of protecting
or conserving property for one or more beneficiaries, and this property
may be property for the personal use of one or more individual
beneficiaries. Decedents' estates are generally formed to hold a
deceased owner's property for one or more legatees or heirs and then
distribute that property to one or more legatees or heirs. Less
commonly, a decedent's estate may purchase property for the personal
use of one or more individual legatees or heirs. Thus, some decedents'
estates and non-grantor trusts that incur indebtedness to purchase APVs
may qualify to deduct QPVLI. Other non-grantor trusts might never be
able to satisfy the personal use test (for example, qualified funeral
trusts as defined in section 685(b) of the Code) and thus would not be
able to deduct QPVLI.
In contrast to decedents' estates and non-grantor trusts, business
entities generally are formed for the purpose of carrying on profit-
making activities. Business entities cannot satisfy the personal use
requirement of section 163(h)(4)(B)(i) and proposed Sec. 1.163-
16(f)(1) and therefore would not qualify to deduct QPVLI under proposed
Sec. 1.163-16(a)(2).
3. Determination of Personal Use Based on Intent at the Time
Indebtedness Is Incurred
Many taxpayers purchase a vehicle and expect to use it partially
for personal use and partially for non-personal use. Section
163(h)(4)(B) does not require that a vehicle be purchased exclusively
for personal use. Taxpayers may not be able to estimate with precision
the relative proportions of these different types of uses at the time
of purchase, and requiring taxpayers to make a determination regarding
the exact amount of expected personal use and non-personal use is not
administrable and may result in a considerable burden to taxpayers.
Additionally, section 163(h)(4) does not require that the person
incurring indebtedness for the purchase of the vehicle be the same
person that satisfies the personal use requirement. One member of a
family may purchase a vehicle for personal use by another member of the
family, and such purchase would satisfy the personal use requirement of
section 163(h)(4).
Proposed Sec. 1.163-16(f)(1) would provide that a taxpayer is
considered to purchase that APV for personal use if, at the time the
indebtedness is incurred, the taxpayer expects that the APV will be
used for personal use by the taxpayer that incurred the indebtedness,
or by certain members of that taxpayer's family and household, for more
than 50 percent of the time. The proposed 50 percent threshold is
intended to correspond to a vehicle being predominantly used for
``personal use'' within the meaning of section 163(h)(4)(B)(i) while
still allowing taxpayers with considerable non-personal use to benefit
from the deduction. The Treasury Department and the IRS understand that
automotive retail installment sales contracts often indicate whether
the purchased vehicle is for personal use or business use. Therefore,
at the time a vehicle loan is incurred, the taxpayer financing the
vehicle may have contemplated the intended use of a vehicle in a way
that would facilitate evaluating this 50 percent personal use standard.
In evaluating whether a taxpayer meets this personal use standard, it
is intended that the IRS may consider information relating to the
expected usage of the vehicle, such as information contained in the
loan documentation and the type of collision and liability insurance
held with respect to a vehicle.
Section 163(h)(4)(B)(i) of the Code could be read to require the
personal use standard to be met only by reference to use by the
taxpayer that incurred indebtedness to purchase the APV. However, the
House Budget Report for Public Law 119-21 states that section 163(h)(4)
was intended to ``ease the financial burden of car ownership for
working and growing families'' (H.R. Rep. No. 119-106, at 1510 (2025)).
As a result, such a narrow standard would appear contrary to
Congressional intent in enacting section 163(h)(4) and contrary to
common practices of the purchase and use of vehicles by families.
Accordingly, proposed Sec. 1.163-16(f)(1) would adopt a broader
standard to allow usage by the taxpayer that incurred the indebtedness,
that taxpayer's spouse, or an individual that is related to the
taxpayer within the meaning of section 152(c)(2) or (d)(2) of the Code,
or any combination of these individuals to qualify.
Additionally, proposed Sec. 1.163-16(f)(2) would provide that, for
purposes of determining whether a decedent's estate or non-grantor
trust expects that an APV will be used for personal use, the
determination is based on the expected personal use of the vehicle by
the legatees or heirs, or beneficiaries, respectively, who have a
present or future interest in such decedent's estate or non-grantor
trust; the spouse of such legatees, heirs, or beneficiaries; or an
individual that is related to such legatees, heirs, or beneficiaries
within the meaning of section 152(c)(2) or (d)(2), or a combination of
these individuals.
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. As a result, a
taxpayer is not required to reevaluate personal and non-personal use in
taxable years after the indebtedness is incurred. Differences between
expected use and later actual use do not affect the taxpayer's
eligibility to deduct QPVLI, nor the amount of the taxpayer's QPVLI.
The taxpayer must evaluate and determine that the personal use
requirement is met at the time the indebtedness is incurred.
Under proposed Sec. 1.163-16(f)(1), an individual, decedent's
estate, or non-grantor trust that receives an APV subject to an SPVL by
reason of an obligor's death would not be required to evaluate whether
it satisfies the personal use requirement; instead, the indebtedness
would be an SPVL if it was an SPVL in the hands of the decedent
(meaning, among other things, that the decedent satisfied the personal
use requirement).
See part I.I of this Explanation of Provisions (Non-personal use
and independently deductible interest) that discusses certain proposed
rules relating to vehicles used for non-personal use and independently
deductible interest.
Proposed Sec. 1.163-16(f)(3) would provide examples that
illustrate the application of proposed Sec. 1.163-16(f).
I. Non-Personal Use and Independently Deductible Interest
Under section 163(a), taxpayers may deduct interest that is QPVLI
as a different type of interest in certain circumstances. For example,
taxpayers paying interest attributable to a vehicle used in a trade or
business may be able to deduct that interest as a business interest
expense. The Treasury Department and the IRS understand that some
taxpayers may prefer to deduct
[[Page 74]]
QPVLI as a different type of interest. Further, section 163(h)(4) does
not affect the ability of a taxpayer to deduct interest that is
otherwise able to be deducted under section 163(a) or a different
section of the Code. Accordingly, the proposed regulations would
provide certain rules with respect to interest that is both QPVLI and
interest otherwise deductible under section 163(a) or a different
section of the Code. These proposed rules are intended to provide
clarity for taxpayers and to prevent taxpayers from claiming
duplicative interest deductions.
Proposed Sec. 1.163-16(g)(1) would provide that independently
deductible interest means interest paid or accrued that is QPVLI (prior
to the application of the dollar limitation in section 163(h)(4)(C)(i)
of the Code and in proposed Sec. 1.163-16(h)(1) and determined without
regard to proposed Sec. 1.163-16(g)) and that also is deductible as a
different type of interest under section 163(a) or a different section
of the Code.
Proposed Sec. 1.163-16(g)(2) would provide that all independently
deductible interest may be deductible as QPVLI or may be deductible as
a different type of interest described in proposed Sec. 1.163-16(g)(1)
(non-QPVLI). In addition, proposed Sec. 1.163-16(g)(2) would provide
that the amount of independently deductible interest that may be
deductible as QPVLI (before the application of the $10,000 limitation
in section 163(h)(4)(C)(i)) is reduced dollar for dollar to the extent
the taxpayer deducts that interest as non-QPVLI. These proposed
provisions are intended to make clear that taxpayers may take any
available interest deductions permitted under section 163(a) or a
different section, while clarifying that a taxpayer may not deduct more
total interest than otherwise is allowable. To ensure no amount of
interest is deducted both as QPVLI and as some other type of deductible
interest, proposed Sec. 1.163-16(g)(3) would provide that a taxpayer
must report any amount of independently deductible interest that is
deducted in a taxable year as non-QPVLI on Form 1040 Schedule 1-A (or
successor) or other relevant form.
Non-interest vehicle expenses deducted by a taxpayer would not
affect the taxpayer's treatment of independently deductible interest or
require any additional reporting. For example, non-interest vehicle
expenses deducted by a taxpayer under section 162(a) as trade or
business expenses have no effect on interest deducted as QPVLI for that
taxable year. These amounts would not be subject to any of the proposed
provisions relating to independently deductible interest.
Proposed Sec. 1.163-16(g)(4) would provide examples that
illustrate the application of proposed Sec. 1.163-16(g), including
examples in which a taxpayer chooses to deduct independently deductible
interest as QPVLI, and alternatively in which the taxpayer chooses to
deduct independently deductible interest as non-QPVLI.
J. Limitations of QPVLI
Section 163(h)(4)(C)(i) provides that the deduction allowed for
QPVLI by a taxpayer for any taxable year cannot exceed $10,000. Section
163(h)(4)(C)(i) does not provide a different amount for joint filers
(in contrast to section 163(h)(4)(C)(ii), discussed in the immediately
following paragraph). Accordingly, proposed Sec. 1.163-16(h)(1) would
clarify that this $10,000 limitation applies per Federal tax return.
Thus, the maximum deduction allowed on a joint Federal income tax
return is $10,000. If two taxpayers have a Federal income tax return
filing status of married filing separately, the $10,000 limitation
would apply separately to each taxpayer's return.
Section 163(h)(4)(C)(ii) provides that the amount otherwise
allowable as a deduction under section 163(a) as QPVLI (after the
application of the section 163(h)(4)(C)(i) dollar limitation) is
reduced (but not below zero) 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. In the case of married taxpayers
filing a joint Federal income tax return, section 163(h)(4)(C)(ii)
provides that this reduction begins after the taxpayer's modified
adjusted gross income exceeds $200,000.
With respect to the deduction of QPVLI by a decedent's estate or
non-grantor trust (as would be defined in proposed Sec. 1.163-
16(b)(9)), the modified adjusted gross income threshold of $100,000
would be applied to the decedent's estate or non-grantor trust, and not
with respect to the beneficiaries of the decedent's estate or non-
grantor trust. In the case of a decedent's estate or non-grantor trust,
proposed Sec. 1.163-16(b)(7)(ii) would provide that the term
``modified adjusted gross income'' means adjusted gross income (as
defined in section 67(e) of the Code).
Proposed Sec. 1.163-16(h)(3) would provide examples that
illustrate the application of proposed Sec. 1.163-16(h).
II. Explanation of Proposed Sec. 1.6050AA-1
A. In General
The proposed regulations under section 6050AA would provide the
operational, administrative, and definitional rules for persons in a
trade or business who receive interest on an SPVL to comply with the
statutory information reporting requirements with respect to receipt of
interest to which section 163(h)(4) and proposed Sec. 1.163-16 would
apply.
In general, under section 6050AA and proposed Sec. 1.6050AA-1(a),
if the interest recipient receives from any individual at least $600 of
interest on an SPVL for a calendar year, the interest recipient would
be required to file an information return with the IRS and furnish a
statement to the payor of record on the SPVL.
B. Definitions
1. Applicable Passenger Vehicle (APV)
Proposed Sec. 1.6050AA-1(b)(1) would provide that the term
``applicable passenger vehicle'' or ``APV'' has the meaning provided in
section 163(h)(4)(D) and proposed Sec. 1.163-16(b)(1). See part I.G of
this Explanation of Provisions (Applicable passenger vehicle (APV)).
2. Calendar Year
Proposed Sec. 1.6050AA-1(b)(2) would provide that the calendar
year for which interest is received is the later of the calendar year
in which the interest is received or the calendar year in which the
interest properly accrues. In order to account for certain payments
occurring near year end, the proposed regulations would also permit an
interest recipient to report in the current calendar year prepaid
interest accruing shortly after year-end. Proposed Sec. 1.6050AA-
1(b)(2)(ii) would permit an interest recipient to report as interest
received during the current calendar year prepaid interest properly
accruing by the following January 15. An interest recipient that
reports as interest received during the current calendar year prepaid
interest properly accruing by the following January 15 would not report
that prepaid interest in the following calendar year. These proposed
rules are consistent with the rules for reporting mortgage interest
under section 6050H.
3. Interest Recipient
Proposed Sec. 1.6050AA-1(b)(3) would provide that the term
``interest recipient'' means a person that is engaged in a trade or
business, whether or not the trade or business of lending
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money, and that, in the course of that trade or business, receives
interest on an SPVL.
The Treasury Department and the IRS understand that, in some
situations, a person collects interest on an SPVL on behalf of another
(for example, the lender of record). The proposed rules provide that,
in that situation, the person that first receives the interest
generally would be required to report under proposed Sec. 1.6050AA-
1(a), and no reporting would be required upon the transfer of the
interest from the interest recipient to the person on whose behalf the
interest recipient received the interest. However, an initial recipient
would not be required to report interest received on behalf of the
person on whose behalf the interest recipient received the interest if
the initial recipient does not possess the reporting information for
the borrower and the person on whose behalf the interest recipient
received the interest is engaged in a trade or business and would
receive the interest in the course of its trade or business if it
received the interest directly. In this situation, proposed Sec.
1.6050AA-1(b)(3)(ii)(A) would require the person on whose behalf the
interest recipient received the interest, rather than the initial
recipient, to report.
4. Lender of Record
Proposed Sec. 1.6050AA-1(b)(4) would provide that the term
``lender of record'' means the person who, at the time the loan is
made, is named as the lender on the loan documents and whose right to
receive payment from the payor of record is secured by a lien on the
payor of record's APV. The proposed regulations would also provide that
an intention by the lender of record to sell or otherwise transfer the
loan to a third party subsequent to the close of the transaction would
not affect the determination of who is the lender of record. As a
result of the interaction between proposed Sec. 1.6050AA-1(b)(4) and
(a)(2), a lender of record would be required to file an information
return with the IRS and furnish a statement to the payor of record on
the SPVL if they receive at least $600 of interest on an SPVL for a
calendar year, even if they intend to transfer the loan to a third
party.
5. Payor of Record
The Treasury Department and the IRS understand that interest
recipients maintain books and records regarding loans but do not
necessarily track the identity of the party actually making the
payments on a particular loan. The Treasury Department and the IRS also
understand that some interest recipients provide SPVLs as well as home
mortgage loans and these interest recipients have an established
practice for determining the payor of record with respect to such
mortgage loans. Accordingly, the Treasury Department and the IRS are
proposing a definition of the term ``payor of record'' that is similar
to the definition of payor of record in Sec. 1.6050H-1(b)(3). Proposed
Sec. 1.6050AA-1(b)(5) would define a payor of record on an SPVL as any
person carried on the books and records of the interest recipient as
the principal borrower on the SPVL. To prevent the duplicate reporting
of information, if the books and records of the interest recipient do
not indicate which borrower is the principal borrower, the proposed
regulations would provide the interest recipient must designate a
borrower as the principal borrower. As a result of the interaction
between proposed Sec. 1.6050AA-1(b)(5) and (a)(2), only the payor of
record would be furnished a written statement on the SPVL under
proposed Sec. 1.6050AA-1(a)(2)(ii).
As described in part I.B of this Explanation of Provisions
(Taxpayers that may deduct QPVLI), proposed Sec. 1.163-16(a)(2)(i)
would provide that only individuals, decedents' estates, and non-
grantor trusts may deduct interest under section 163(h)(4). Because
only these persons would need the information reported under section
6050AA to complete their income tax returns, proposed Sec. 1.6050AA-
1(b)(5) would also provide the term ``person'' means any individual,
decedent's estate, or non-grantor trust.
6. Secretary
Proposed Sec. 1.6050AA-1(b)(6) would provide that the term
``Secretary'' has the meaning provided in section 7701(a)(11) of the
Code.
7. Specified Passenger Vehicle Loan (SPVL)
Section 6050AA(d)(2) provides that the term ``specified passenger
vehicle loan'' means the indebtedness described in section 163(h)(4)(B)
with respect to any APV. Proposed Sec. 1.6050AA-1(b)(7) would adopt
this definition and would provide that the term ``specified passenger
vehicle loan'' or ``SPVL'' has the meaning provided in proposed Sec.
1.163-16(b)(15). See part I.E of this Explanation of Provisions
(Specified passenger vehicle loan (SPVL)).
C. Reporting by Foreign Person
The Treasury Department and the IRS are aware that some foreign
persons may receive interest on SPVLs. Individual borrowers may not be
aware that the interest recipient is a foreign person. Under proposed
Sec. 1.6050AA-1(c)(1), an interest recipient that is a foreign person
would be required to report with respect to interest received on an
SPVL to the extent such interest is received at a location in the
United States. For example, a foreign bank with a branch located in the
United States would be required to report with respect to interest
received on an SPVL received at their U.S. branch. Under proposed Sec.
1.6050AA-1(c)(2), an interest recipient that is a foreign person and
receives interest at locations outside the United States would be
required to report only if the foreign person is a controlled foreign
corporation (as defined in section 957(a)) or if 50 percent or more of
the foreign person's gross income was effectively connected with the
conduct of a trade or business within the United States. This proposed
50-percent figure would be calculated based on the three-year period
ending with the close of the taxable year preceding the receipt of
interest. These rules are similar to the rules applicable to foreign
persons that receive home mortgage interest in Sec. 1.6050H-1(d)(1).
D. Reporting With Respect to a Nonresident Alien Individual, Foreign
Decedent's Estate, or Foreign Non-Grantor Trust
Proposed Sec. 1.6050AA-1(d)(1) would provide that the reporting
requirement of section 6050AA would not apply if the payor of record is
a nonresident alien individual, foreign decedent's estate, or foreign
non-grantor trust. Proposed Sec. 1.6050AA-1(d)(2) would provide the
documentation rules that the interest recipient would be required to
follow to determine whether the payor of record is a nonresident alien
individual, foreign decedent's estate, or foreign non-grantor trust.
These rules are similar to the rules applicable to nonresident alien
individuals that receive home mortgage interest in Sec. 1.6050H-
1(d)(2).
E. Determining if a Loan Is an SPVL
The Treasury Department and the IRS understand that interest
recipients will often not be the person listed on the loan documents as
the lender of record but that these interest recipients are instead
listed on subsequent loan documents as assignees whose right to receive
payment from the payor of record is secured by a lien on the payor of
record's APV. Regarding the ability of these assignees to determine
whether a loan is an SPVL, the Treasury Department and the IRS
understand that these assignees typically receive
[[Page 76]]
information as part of the loan assignment process that should largely
enable them to determine whether reporting is required for the assigned
loan. In particular, the Treasury Department and the IRS understand
these assignees typically receive a copy of the retail installment
sales contract, which generally includes relevant information,
including the VIN, which these interest recipients can use to determine
whether the vehicle's plant of manufacture is located in the United
States, and information regarding the items and amounts financed in
connection with the purchase of the vehicle. Accordingly, the Treasury
Department and the IRS expect that assignees will have most of the
information needed based on current business practices.
One piece of relevant information that assignees may not have as
result of receiving a copy of the retail installment sales contract is
whether the personal use requirement is met. The Treasury Department
and the IRS understand that while retail installment sales contracts
often include some indication of whether a vehicle is purchased for
personal or business use, this is not true of all such contracts and,
for those that include some indication, the information in the contract
may not be sufficient for the assignee to determine if the personal use
requirement is met. If the information in the contract is sufficient
for an assignee of the loan to determine that the personal use
requirement is met, then, in the absence of conflicting information,
the assignee may rely on that information for purposes of satisfying
its information reporting obligations. The assignee may choose to make
arrangements to obtain information regarding personal use from the
obligor, from the lender of record, or by some other means.
F. Amount of Interest Received on an SPVL for the Calendar Year
Section 6050AA(a) provides that the information return relates to
interest received on an SPVL. Accordingly, under proposed Sec.
1.6050AA-1(e), whether an interest recipient receives $600 or more of
interest on an SPVL would be determined on an SPVL-by-SPVL basis. An
interest recipient would not be required to report interest of less
than $600 received on an SPVL, even if it receives a total of $600 or
more of interest on SPVLs from different vehicles from the same payor
of record during a calendar year.
The Treasury Department and the IRS are aware that it might be
burdensome for interest recipients to determine which SPVLs require
reporting under section 6050AA in a given year based on the amount of
interest received. To alleviate this burden and because the information
may be useful to taxpayers claiming a deduction for QPVLI of less than
$600, proposed Sec. 1.6050AA-1(a)(3) would permit, but not require, an
interest recipient to report its receipt of less than $600 of interest
on an SPVL for a calendar year. To provide taxpayers with accurate
information to claim the deduction, an interest recipient that chooses
to file an information return under section 6050AA of less than $600
would be subject to the requirements of proposed Sec. 1.6050AA-1.
G. Requirement To File Information Return
Section 6050AA(b) provides that the information return filed by the
interest recipient must be in the form prescribed by the Secretary and
contain certain information. Accordingly, under proposed Sec.
1.6050AA-1(f)(2), the interest recipient would be required to file a
form designated by the Secretary that contains: (i) the name, address,
and taxpayer identification number of the payor of record; (ii) the
name, address, and taxpayer identification number of the interest
recipient; (iii) the amount of interest received for the calendar year;
(iv) the amount of outstanding principal on the SPVL as of the
beginning of such calendar year; (v) the date of origination of such
loan; (vi) the year, make, model, and VIN of the APV that secures such
loan; (vii) the date the SPVL was acquired; and (viii) any other
information required by the form or its instructions.
These items generally follow the items prescribed in section
6050AA(f)(2). In addition, because the Treasury Department and the IRS
understand SPVLs may be sold or otherwise transferred to a new lender
of record, proposed Sec. 1.6050AA-1(f)(2)(vii) would require the
lender of record to include the date it acquired the loan on the form.
H. Requirement To Furnish Written Statement
Proposed Sec. 1.6050AA-1(g) would require the interest recipient
that would be required to file a return under proposed Sec. 1.6050AA-
1(a) to furnish a statement to the payor of record. For rules regarding
electronic delivery of these written statements, see Revenue Procedure
2025-22 (2025-30 IRB 200) (or its successor), republished as
Publication 1179, ``General Rules and Specifications for Substitute
Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns).''
For purposes of tax administration, the proposed requirement to
furnish written statements would require that those with a reporting
obligation must provide statements to certain recipients containing the
information reported to the IRS and, in some cases, additional
information. Under proposed Sec. 1.6050AA-1(g), the recipient would be
the payor of record, and the written statement would be required to
include the information that was reported on the form designated for
this purpose. In addition, the written statement must include a legend
that would identify the statement as important tax information that is
being furnished to the IRS and would state that penalties may apply if
the payor of record overstated a deduction for interest reported on the
statement. To minimize the risk of recipients claiming an interest
deduction that is limited by section 163(h)(4)(C) or otherwise
ineligible, proposed Sec. 1.6050AA-1(g)(2)(ii) would also require that
the written statement include a legend stating that the payor of record
may be unable to deduct the full amount of interest reported on the
statement.
I. Due Dates
Section 6050AA(a) provides that the information return must be
filed at such time as the Secretary may prescribe. Further, under
section 6050AA(c), the written statement must be furnished to the
recipient on or before January 31 of the year following the calendar
year for which the information return was required to be made. Under
proposed Sec. 1.6050AA-1(f)(3), the interest recipient would be
required to file the information return on or before February 28 (March
31 if filed electronically) of the year following the calendar year in
which it receives the interest. To ensure the payor of record has the
information necessary to prepare the payor's income tax return, and as
directed by section 6050AA(c), proposed Sec. 1.6050AA-1(g)(5) would
require the interest recipient to furnish to the payor of record the
written statement on or before January 31 of the year following the
calendar year for which it receives the interest on the SPVL.
III. Explanation of Proposed Amendments to Sec. 301.6011-2
Section 6011(e)(5) authorizes the Secretary to prescribe
regulations that require taxpayers to electronically file returns,
including information returns, if the taxpayer is required to file at
least 10 returns of any type during a calendar year. On February 23,
2023, the Secretary published final regulations
[[Page 77]]
implementing this 10-return threshold. TD 9972, 88 FR 11754 (February
23, 2023). Section 301.6011-2(b) prescribes the information returns
that must be filed electronically once the ten-return threshold set out
in Sec. 301.6011-2(c)(1) is met. Consistent with section 6011(e)(5)
and the existing regulations, proposed Sec. 301.6011-2(b)(1) would add
the return required under section 6050AA to the list of returns that
must be filed electronically. Recipients of interest on SPVLs must file
the information return required by section 6050AA and these regulations
electronically if they are required to file at least 10 returns that
calendar year. Any interest recipients required to file fewer than 10
returns during a calendar year may choose to make the information
return reporting the interest electronically.
IV. Explanation of Proposed Amendments to Sec. 301.6721-1
As amended by the OBBBA, section 6724(d)(1)(B)(xxix) defines an
information return for purposes of the penalty imposed by section 6721
as including a return required by section 6050AA(a). Consistent with
section 6724(d)(1)(B)(xxix), proposed Sec. 301.6721-1(h)(3)(xxviii)
would add returns required by section 6050AA to the list of information
returns included in Sec. 301.6721-1 (Failure to furnish correct
information returns).
V. Explanation of Proposed Amendments to Sec. 301.6722-1
As amended by the OBBBA, section 6724(d)(2)(MM) defines a payee
statement for purposes of the penalty imposed by section 6722 as
including a statement required by section 6050AA(c). Consistent with
section 6724(d)(2)(MM), proposed Sec. 301.6722-1(e)(2)(xxxix) would
add returns required by section 6050AA to the list of payee statements
included in Sec. 301.6722-1 (Failure to furnish correct payee
statements).
Proposed Applicability Dates
The regulations under section 163 are proposed to apply to taxable
years in which taxpayers may deduct QPVLI pursuant to section
163(h)(4). The regulations under section 6050AA are proposed to apply
to calendar years in which taxpayers may deduct QPVLI pursuant to
section 163(h)(4). A taxpayer may rely on the proposed regulations
under section 163 with respect to indebtedness incurred for the
purchase of an APV 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. Similarly, interest
recipients may rely on the proposed regulations under section 6050AA
with respect to indebtedness incurred for the purchase of an APV 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.
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
Executive Orders 12866 and 13563 direct agencies to assess costs
and benefits of available regulatory alternatives and, if regulation is
necessary, to select regulatory approaches that maximize net benefits
(including potential economic, environmental, public health and safety
effects, distributive impacts, and equity). Executive Order 13563
emphasizes the importance of quantifying both costs and benefits,
reducing costs, harmonizing rules, and promoting flexibility.
The proposed regulations have been designated by the Office of
Management and Budget's (OMB's) Office of Information and Regulatory
Affairs (OIRA) as subject to review under Executive Order 12866
pursuant to the Memorandum of Agreement (MOA, July 4, 2025) between the
Treasury Department and the Office of Management and Budget regarding
review of tax regulations. OIRA has determined that the proposed
rulemaking is significant under section 3(f)(1) of Executive Order
12866 and subject to review under Executive Order 12866 and section
1(b) of the MOA. Accordingly, the proposed regulations have been
reviewed by OMB.
This proposed rule, if finalized, is expected to be an Executive
Order 14192 regulatory action.
Need for Regulation
Section 70203 of Public Law 119-21, 139 Stat. 72 (July 4, 2025),
commonly known as the One, Big, Beautiful Bill Act (OBBBA), amends
section 163(h) of the Internal Revenue Code \1\ to provide a newly
allowable income tax deduction for qualified passenger vehicle loan
interest (QPVLI). In the absence of regulations, taxpayers would face
substantial uncertainty about which vehicle loan interest is eligible
for the deduction. The OBBBA also establishes section 6050AA of the
Code to require interest recipients receiving at least $600 of interest
on a specified passenger vehicle loan (SPVL) within a calendar year to
file an information return with the Internal Revenue Service (IRS) and
furnish a statement to the payor of record. In the absence of guidance,
interest recipients would face uncertainty about how to comply with the
requirements.
---------------------------------------------------------------------------
\1\ References to a ``section'' are to a section of the Internal
Revenue Code of 1986, as amended (Code), unless otherwise indicated.
---------------------------------------------------------------------------
The proposed regulations would clarify the statute for taxpayers
and lenders, including by: defining ``personal use'' and providing a
standard for ``personal use'' of a vehicle; clarifying the requirements
for interest to be QPVLI; clarifying the requirements for indebtedness
to be a SPVL; defining ``indebtedness incurred for the purchase of an
applicable passenger vehicle'' to include the cost of warranties,
service plans, and other amounts customarily financed in a vehicle
purchase transaction and that are directly related to the purchased
vehicle; establishing which information must be reported by lenders to
comply with the information reporting requirements; clarifying that the
deduction is limited to $10,000 per return, regardless of the
taxpayer's filing status; providing rules for determining whether
``final assembly'' of a vehicle occurred in the United States; and
offering further definitions and clarifications of terms in section
163(h)(4) and section 6050AA, such as the vehicle identification number
(VIN).
I. The Statute and Proposed Regulations
Under section 163(h)(1), certain taxpayers cannot deduct personal
interest paid or accrued during the taxable year. Section 70203(a) of
the OBBBA adds a new section to the Code, section 163(h)(4). Section
163(h)(4)(A) provides that, in the case of taxable years beginning
after December 31, 2024, and before January 1, 2029, personal interest
does not include QPVLI. This allows taxpayers to deduct QPVLI for
taxable years beginning after December 31, 2024, and before January 1,
2029. 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. Section 163(h)(4)(B) also includes exceptions to QPVLI,
such as financing for commercial vehicles or lease financing, and a
requirement for taxpayers to include the VIN of the APV on the tax
return in order to claim the deduction.
[[Page 78]]
The proposed regulations would provide definitions and
clarifications of terms related to QPVLI in section 163(h)(4) and
section 6050AA. The proposed regulations would clarify that
individuals, decedents' estates, and non-grantor trusts may deduct
QPVLI. The proposed regulations would provide that interest is only
QPVLI if the interest 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 otherwise excluded from the definition of QPVLI. The proposed
regulations would adopt a standard for personal use that would provide
that a taxpayer is considered to purchase an APV for personal use if,
at the time the indebtedness is incurred, the taxpayer expects that the
APV will be used for personal use by the taxpayer that incurred the
indebtedness, that taxpayer's spouse, or an individual that is related
to the taxpayer within the meaning of sections 152(c)(2) or (d)(2) of
the Code, or any combination of these individuals, for more than 50
percent of the time the taxpayer expects to own the APV. The proposed
50 percent threshold is intended to correspond to a vehicle being
predominantly used for ``personal use'' within the meaning of section
163(h)(4)(B)(i) while still allowing taxpayers with considerable non-
personal use to benefit from the deduction. If the taxpayer is a
decedent's estate or non-grantor trust, personal use is tested based on
the use by legatees or heirs, or beneficiaries, respectively. Further,
under the proposed regulations, the taxpayer would not be required to
reevaluate compliance with the personal use standard in taxable years
after the indebtedness is incurred. The proposed regulations also would
clarify that taxpayers may not deduct the same interest as both QPVLI
and otherwise deductible interest (such as a business interest expense)
and that taxpayers must report certain information relating to vehicle
interest deducted independent of QPVLI.
Typical auto loan sales contracts indicate an ``amount financed''
that may include property and services in addition to the amount for
the price of the vehicle. The proposed regulations would provide that
indebtedness incurred for the purchase of an APV as well as for certain
items or amounts customarily financed in an APV purchase transaction
and that are directly related to the purchased APV is an SPVL and
therefore interest paid or accrued on such indebtedness is potentially
eligible to be deducted. The regulations describe certain items and
services that are considered customarily financed in an APV purchase
transaction and that are directly related to the purchased APV, such as
vehicle service plans, extended warranties, sales taxes, and vehicle-
related fees. Indebtedness not incurred for the purchase of an APV nor
for any other items or amounts customarily financed in an APV purchase
transaction and that are directly related to the purchased APV, and,
therefore, interest paid or accrued on such indebtedness is not QPVLI.
For example, to the extent that a taxpayer incurs indebtedness to
purchase collision and liability insurance or to purchase any property
or services unrelated to the vehicle (for example, a trailer or a
boat), that indebtedness is not an SPVL, and, therefore, interest paid
or accrued on that indebtedness is not QPVLI and may not be deducted
under section 163(h)(4).
Section 163(h)(4)(C) establishes limitations on the amount of QPVLI
that a taxpayer may deduct. The dollar limit is $10,000 per taxable
year. The proposed regulations would clarify that this limit applies
regardless of the taxpayer's filing status for that taxable year.
Additionally, under section 163(h)(4)(C), the deduction for QPVLI is
reduced (but not below zero) by $200 for each $1,000 (or portion
thereof) by which the taxpayer's modified adjusted gross income (MAGI)
exceeds $100,000 ($200,000 in the case of a married couple filing a
joint return). Section 163(h)(4)(C) defines ``modified adjusted gross
income'' for the purposes of this phaseout as adjusted gross income of
the taxpayer for the taxable year plus any amount excluded from gross
income under sections 911, 931, or 933. The proposed regulations would
clarify that for estates and non-grantor trusts, the MAGI phaseout is
applied to the estate or trust, not with respect to the beneficiaries
of the estate or trust; and for estates and non-grantor trusts, MAGI
means AGI as defined in section 67(e).
Section 163(h)(4)(D) defines the term ``applicable passenger
vehicle''. The criteria for an APV include that its original use must
commence with the taxpayer and that its final assembly must have
occurred in the United States. The proposed regulations would provide
rules for determining whether original use of a vehicle begins with the
taxpayer, rules for whether a vehicle's final assembly occurred in the
United States, and definitions for other APV-related terms used in the
statute. Original use commences with the first person that takes
delivery of a vehicle after the vehicle is sold, registered, or titled.
For purchasers that are not dealers, original use does not commence
with the taxpayer unless the loan documentation treats the vehicle as a
new vehicle. For dealers, original use does not commence with the
dealer unless the dealer registers or titles the vehicle. The proposed
regulations would provide that taxpayers can determine the location of
final assembly by (1) the plant of manufacture as reported in the VIN
or (2) the final assembly point reported on the label affixed to the
vehicle.
Section 163(h)(4)(E) provides other definitions and special rules.
These include the treatment of refinancing and of indebtedness owed to
related parties. The proposed regulations would clarify that for
refinanced loans, the amount of the new loan on which interest is
considered QPVLI is limited to the outstanding balance of the
refinanced loan as of the date of the refinancing.
Section 70203(b) of the OBBBA amends section 63(b) of the Code so
that the deduction for QPVLI is allowed for taxpayers who do not elect
to itemize their deductions. The proposed regulations would clarify
that the deduction is available to taxpayers who itemize their
deductions and to taxpayers who claim the standard deduction.
Section 70203(c) of the OBBBA adds a new section 6050AA to the Code
that establishes information reporting requirements for QPVLI. Any
person who, in the course of a trade or business, receives from any
individual more than $600 in a calendar year on a SPVL must provide an
information return to the IRS and furnish a statement to the payor of
record. The proposed regulations would provide operational definitions
and rules for complying with the information reporting requirements.
The regulations clarify the need to report the date the SPVL was
acquired; require that the statement to the payor of record includes a
legend clarifying that the taxpayer may be unable to deduct the full
amount of interest shown on the statement; and offer guidance on
reporting by and to certain foreign persons. To prevent duplicate
reporting, the proposed regulations also would provide that if an
interest recipient's records for a loan do not indicate which borrower
is the principal borrower, the interest recipient must designate a
principal borrower. This follows established practice with respect to
information reporting requirements for qualified residence interest.
[[Page 79]]
II. Baseline
The Treasury Department and the IRS have assessed the benefits and
costs of the proposed regulations relative to a no-action baseline
reflecting anticipated Federal income tax-related behavior in the
absence of these proposed regulations.
III. Affected Entities and Taxpayers
The proposed regulations would affect individuals, decedents'
estates, and non-grantor trusts that may deduct QPVLI, and also would
affect any person engaged in a trade or business, who, in the course of
that trade or business, receives interest aggregating $600 or more for
any calendar year on an SPVL and is therefore subject to certain
information reporting requirements. As described in the preamble to the
proposed regulations, interest recipients receiving less than $600 of
interest on an SPVL would have the option to provide information
returns.
Under section 163(h)(4), the deduction is limited to interest on
loans for vehicles with final assembly occurring in the U.S. whose
original use commences with the taxpayer. The Treasury Department and
the IRS estimate that in 2024, roughly 6 million loans originated on
new, U.S.-assembled vehicles. (See Table A.) Retail sales of new light
vehicles in the U.S. totaled about 16 million in 2024; \2\ roughly 60
percent of new vehicle purchases are financed with loans; \3\ and
analysis of vehicle model sales data suggests that about 60 percent of
vehicles sold in the U.S. undergo U.S. final assembly. The Treasury
Department and the IRS do not have an estimate of the number of estates
and non-grantor trusts that are obligors on auto loans.
---------------------------------------------------------------------------
\2\ ``Light vehicle retail sales in the United States from 1976
to 2024,'' Statista, last accessed October 27, 2025, <a href="https://www.statista.com/statistics/199983/us-vehicle-sales-since-1951/">https://www.statista.com/statistics/199983/us-vehicle-sales-since-1951/</a>;
<a href="https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles">https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles</a>; ``New and used passenger car and light
truck sales and leases,'' Bureau of Transportation Statistics, last
accessed October 27, 2025, <a href="https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles">https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles</a>. The 16 million
total transactions (row 1 of Table A) includes leases; the share of
new vehicle transactions financed with a loan (row 2 of Table A),
used to estimate the number of loans on new, U.S.-assembled
vehicles, excludes leases.
\3\ ``State of the Automotive Finance Market Report: Q2 2025,''
Experian, last accessed October 27, 2025, <a href="https://www.experian.com/automotive/auto-credit-webinar-form">https://www.experian.com/automotive/auto-credit-webinar-form</a>; ``New and used passenger car
and light truck sales and leases,'' Bureau of Transportation
Statistics, last accessed October 27, 2025, <a href="https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles">https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles</a>.
Table A--Estimated Annual Loans on New, U.S.-Assembled Vehicles
------------------------------------------------------------------------
------------------------------------------------------------------------
1. 2024 U.S. new light vehicle sales....... 16 million.
2. Share of new vehicle sales financed with 60 percent.
loans.
3. Of new vehicles sold, share with U.S. 60 percent.
final assembly.
4. Estimated annual loans on new vehicles Approximately 6 million.
with U.S. final assembly.
------------------------------------------------------------------------
Notes: Row 4 is the rounded product of rows 1, 2, and 3.
Sources: ``Light vehicle retail sales in the United States from 1976 to
2024,'' Statista, last accessed October 27, 2025, <a href="https://www.statista.com/statistics/199983/us-vehicle-sales-since-1951/">https://www.statista.com/statistics/199983/us-vehicle-sales-since-1951/</a>;
<a href="https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles">https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles</a>; ``New and used passenger car and light
truck sales and leases,'' Bureau of Transportation Statistics, last
accessed October 27, 2025, <a href="https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles">https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles</a>; ``State of the
Automotive Finance Market Report: Q2 2025,'' Experian, last accessed
October 27, 2025, <a href="https://www.experian.com/automotive/auto-credit-webinar-form">https://www.experian.com/automotive/auto-credit-webinar-form</a>; manufacturer vehicle model sales data.
To identify the number of businesses that the proposed regulations
are expected to affect, the Treasury Department and the IRS analyzed
confidential tax return data. For tax year 2023, approximately 36,000
businesses filed a tax return with North American Industry
Classification System (NAICS) codes for new car dealers (code 441110),
motorcycle dealers (code 441227), car loan lenders (code 522220), and
consumer lending (code 522291). (See Table B.) This total does not
include used car dealers because the statue and regulations only apply
to loans for new vehicles.
Table B--Estimated Number of Affected Businesses by NAICS Code
------------------------------------------------------------------------
------------------------------------------------------------------------
New car dealers (441110)............................ 17,800
Motorcycle dealers (441227)......................... 4,100
Car loan lenders (522220)........................... 5,800
Consumer lending (522291)........................... 8,100
-------------------
Total........................................... 35,800
------------------------------------------------------------------------
Notes: The table shows counts of tax year 2023 filers of forms 1065,
1120S, or 1120. NAICS codes appear in parentheses.
Source: Treasury Department analysis of confidential tax return data,
October 24, 2025.
IV. Economic Effects of the Proposed Regulations
The proposed regulations would clarify the statute and facilitate
taxpayers claiming the auto loan interest deduction. Consider, for
example, a taxpayer who is purchasing a vehicle. For most people, a
vehicle is a major purchase, and there are many elements to be
considered along the way, including choices between a new versus used
vehicle, a U.S.-assembled versus foreign-assembled vehicle, and a cash
purchase versus a loan or a lease. With the introduction of the
deduction for qualified vehicle loan interest, the taxpayer now faces
questions about whether and how the statute interacts with the vehicle
and financing choices they make. For instance, in the absence of
guidance, the taxpayer may not know 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.
The proposed rules would assist the taxpayer in understanding and
claiming the qualified vehicle loan interest deduction. For example,
the regulations direct taxpayers to the National Highway Traffic Safety
Administration (NHTSA) VIN Decoder website to determine whether a
vehicle underwent final assembly in the United States, a necessary
condition for the vehicle to be
[[Page 80]]
eligible for the deduction. By facilitating taxpayers' understanding of
which vehicles are American made and eligible for the deduction under
the statute, the proposed regulations would reduce taxpayer compliance
burden and, as a result, may also increase consumer demand for vehicles
and financing that are eligible for the deduction, namely loans for
new, U.S.-assembled vehicles. The Treasury Department and the IRS do
not have readily available parameters and models to quantify the extent
of this increase in demand for U.S. assembled vehicles or debt
financing. The following sections describe in further detail the
potential economic impacts of specific elements of the proposed
regulations
a. Personal Use Standard
Section 163(h)(4) limits the deduction to vehicles purchased for
personal use. The proposed regulations would provide a standard for
personal use. To meet the standard, the taxpayer must expect at the
time of purchase that the APV will be used for personal use for more
than 50 percent of the time the taxpayer expects to own the APV. An
alternative standard of personal use could have required mostly or
exclusively personal use of a vehicle for loan interest to be
considered QPVLI.
The 50 percent personal use standard benefits taxpayers who debt-
finance mixed-use vehicles who would be disallowed from taking the
deduction for QPVLI under stricter, alternative standards. Interest on
a vehicle loan that is properly allocable to a trade or business is
generally deductible under section 163(h)(2)(A). Consider, for example,
a taxpayer who finances the purchase of an APV expecting for 60 percent
of use to be for personal use and 40 percent for use in a trade or
business. Assume for a given tax year the taxpayer pays $3,500 in
interest on the vehicle loan, drives the vehicle 55 percent for
personal use and 45 percent for use in a trade or business, and meets
all other requirements to deduct QPVLI and interest properly allocable
to a trade or business. (Note that 55 percent personal use for this tax
year differs somewhat from the taxpayer's expected 60 percent personal
use over the cumulative time the taxpayer expects to own the vehicle.)
Under a strict personal use standard for QPVLI, such as exclusive
personal use, the taxpayer would be prohibited from deducting any
interest as QPVLI, and would only be able to deduct the interest
attributable to use in a trade or business ($1,575, equal to 45 percent
of the $3,500 of interest paid during the year), provided all of the
other requirements for deducting interest properly allocable to a trade
or business are met. Under the 50 percent personal use standard, the
taxpayer can potentially deduct all $3,500 in interest as QPVLI.
Alternatively, the taxpayer would have discretion to deduct $1,575 (45
percent of $3,500) as interest properly allocable to a trade or
business and $1,925 as QPVLI ($3,500 minus $1,575). The 50 percent
personal use standard benefits taxpayers with mixed-use vehicles who,
under a strict personal use standard, would be able to deduct only
interest properly allocable to a trade or business.
The Treasury Department and the IRS examined public survey data and
confidential tax records to assess the prevalence of mixed-use vehicles
that may be affected by the personal use standard. Analysis of Panel
Study of Income Dynamics (PSID) data suggests that, in 2023, 11 percent
of personally owned vehicles were used for mixed personal and business
purposes.\4\ An alternative and narrower definition of personal use,
such as exclusive personal use, would exclude roughly 700,000 loans (11
percent of the estimated 6 million total shown in Table A) from
potential eligibility for the QPVLI deduction. (See Table C.)
---------------------------------------------------------------------------
\4\ See variable ER82936 in the 2023 PSID. The survey language
is: ``Not counting routine use to get to and from work, is this
vehicle also used for business purposes?''
Table C--Estimated Annual Loans on New, U.S.-Assembled Vehicles for
Mixed Personal and Business Use
------------------------------------------------------------------------
------------------------------------------------------------------------
1. Estimated annual loans on new, U.S.- 6 million.
assembled vehicles.
2. Share of personally owned vehicles used 11 percent.
for mixed personal and business purposes.
3. Estimated annual loans on new, U.S.- Approximately 700,000.
assembled vehicles for mixed personal and
business use.
------------------------------------------------------------------------
Notes: Row 3 is the rounded product of rows 1 and 2.
Sources: Row 2 is derived from the 2023 Panel Study of Income Dynamics,
variable ER82936. Row 1 is derived in Table A, with data sourced from:
``Light vehicle retail sales in the United States from 1976 to 2024,''
Statista, last accessed October 27, 2025, <a href="https://www.statista.com/statistics/199983/us-vehicle-sales-since-1951/">https://www.statista.com/statistics/199983/us-vehicle-sales-since-1951/</a>; <a href="https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles">https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles</a> vehicles; ``New and used passenger car and light truck sales and
leases,'' Bureau of Transportation Statistics, last accessed October
27, 2025, <a href="https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles">https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles</a>; ``State of the Automotive Finance
Market Report: Q2 2025,'' Experian, last accessed October 27, 2025,
<a href="https://www.experian.com/automotive/auto-credit-webinar-form">https://www.experian.com/automotive/auto-credit-webinar-form</a>;
manufacturer vehicle model sales data.
Tax records also contain information on mixed personal and business
use vehicles. Sole proprietors file Schedule C to record business
income and expenses, including car or truck expenses. On part IV of
Schedule C, certain taxpayers are required to enter information on
their vehicle, including the date a vehicle was placed in service for
business purposes; the number of miles driven for business, commuting,
and other purposes; and whether the vehicle was available for personal
use during off-duty hours.\5\
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\5\ Taxpayers are required to fill out part IV of Schedule C
only if they claim car or truck expenses on Schedule C and are not
required to file Form 4562 (Depreciation and Amortization) for the
business in question. Taxpayers who have ``listed property,''
including automobiles, are required to enter information on such
automobiles in Section B of Part V of Form 4562.
---------------------------------------------------------------------------
Schedule C data has several limitations for analysis of the
personal use standard. First, Schedule C does not distinguish between
new versus used cars, U.S.- versus foreign-assembled cars, or cars
financed with loans versus cars that are leased or purchased with cash.
Because used cars, foreign-assembled cars, and cars that are leased or
purchased with cash are not eligible for the QPVLI deduction, totals of
mixed-use vehicles from part IV of Schedule C overstate the number of
sole proprietors' vehicles that the personal use standard will affect.
Second, the data available for analysis cover predominantly
electronically filed returns of Schedule C rather than paper filed
returns. Third, the Schedule C data do not include vehicle expenses
that taxpayers may deduct on Schedules E and F. Fourth, the Schedule C
data indicate when the car was placed into service for business use
rather than when the individual first acquired the car. The available
Schedule C data nonetheless provide insight on the prevalence of
personal use of sole proprietors' business vehicles.
[[Page 81]]
The Treasury Department and the IRS estimate that in tax year 2023,
sole proprietors who filed electronically placed 5 million vehicles in
service for business purposes.\6\ See Table D. About 80 percent of
these taxpayers indicated that the vehicle was also available for
personal use during off-duty hours. Among filers for whom the vehicle
was available for personal use, roughly 40 percent drove the vehicle
more than 50 percent of its total mileage for personal use. The typical
filer drove the vehicle for majority business use; the median share of
total miles driven for business purposes was about 80 percent. These
estimates suggest that a substantial share of taxpayers with vehicles
for business use would benefit from the 50 percent personal use
standard, relative to a strict alternative standard, such as exclusive
personal use.
---------------------------------------------------------------------------
\6\ The 5 million total reflects sole proprietorship-vehicle
pairs. A sole proprietor who placed the same vehicle in service for
multiple businesses in 2023 would appear more than once in this
total. Because Schedule C does not include a VIN or other unique
vehicle identifier, Treasury and the IRS cannot distinguish these
cases--the same vehicle placed in service for multiple businesses--
from cases in which a sole proprietor placed multiple vehicles in
service for multiple businesses.
Table D--Statistics on Tax Year 2023 Sole Proprietor Vehicle Use From
Schedule C, Part IV
------------------------------------------------------------------------
------------------------------------------------------------------------
1. Sole proprietors' vehicles placed in 5 million.
business service in tax year 2023 *.
2. Of vehicles placed in business service 80 percent.
in tax year 2023 (row 1), share reported
to be available for personal use.
3. Of vehicles placed in business service 40 percent.
in 2023 and available for personal use,
share reported with more than 50 percent
of mileage for personal use.
4. Of vehicles placed in business service 80 percent.
in 2023 and available for personal use,
median share of miles driven for business
use.
------------------------------------------------------------------------
* This total does not correspond to vehicles eligible for the QPVLI
deduction; it includes used, leased, and foreign-assembled vehicles,
which are not eligible for the QPVLI deduction. See text for further
detail on the Schedule C data and its limitations.
Source: Treasury Department analysis of confidential tax return data,
October 24, 2025.
The proposed personal use rules also benefit taxpayers by providing
clarity. In the absence of a personal use standard, two taxpayers with
otherwise similar tax situations would face uncertainty as to whether
this deduction applies to their situation. Without guidance, these
taxpayers might make different choices as to whether their auto loan
interest qualifies for the deduction, and, therefore, face different
tax liability. Consider, for example, two taxpayers who each buy an APV
expecting for 75 percent of its use to be for personal use and 25
percent for business use (assume they meet all other requirements to
claim the deduction). Taxpayer A interprets the section 163(h)(4)
personal use requirement to mean that interest on the loan is not
QPVLI, because the vehicle is partly for business use. In contrast,
Taxpayer B interprets the personal use requirement to mean that
interest on the loan is QPVLI because a majority of the use of the
vehicle is personal use. The proposed regulations would ensure that
these two taxpayers use the same standard of personal use and are
subject to the same tax treatment.
The proposed personal use standard, relative to a stricter
alternative standard, may change vehicle purchase patterns among
taxpayers who use their vehicles for mixed personal and business
purposes (vehicles on which loan interest would not be considered QPVLI
under a strict personal use standard). For this population, the 50
percent personal use standard would increase the economic appeal of
financing relative to cash purchases and would increase the economic
appeal of new, U.S.-assembled vehicles relative to used or foreign-
assembled vehicles. The extent of consumption changes along these
margins depends on several interacting factors, including: the extent
to which increased demand for new, U.S.-assembled vehicles driven by
the deduction affects the prices of these vehicles; substitution
elasticities between new and used vehicles and between vehicles
assembled in the U.S. and assembled abroad; \7\ the salience of the tax
deduction at the time of purchase; \8\ and the extent to which
taxpayers perceive the deduction as temporary, as prescribed in
statute, or likely to be extended by future policymakers. The Treasury
Department and the IRS do not have readily available parameters and
models to precisely assess the impact. House Budget Committee Report
119-106 expects the deduction to promote domestic manufacturing.
---------------------------------------------------------------------------
\7\ There is limited evidence on elasticities relating directly
to the country of vehicle assembly. See Grieco et al. (2024) for
estimates on consumer responsiveness to prices changes across
vehicle manufacturers. Grieco, Paul L.E., Charles Murry, and Ali
Yurukoglu. 2024. ``The Evolution of Market Power in the U.S.
Automobile Industry.'' The Quarterly Journal of Economics 139 (2):
1201-1253, <a href="https://academic.oup.com/qje/article-abstract/139/2/1201/7276495?redirectedFrom=fulltext">https://academic.oup.com/qje/article-abstract/139/2/1201/7276495?redirectedFrom=fulltext</a>.
\8\ Chetty, Raj, Adam Looney, and Kory Kroft. 2009. ``Salience
and Taxation: Theory and Evidence.'' American Economic Review 99
(4): 1145-77, <a href="https://www.aeaweb.org/articles?id=10.1257/aer.99.4.1145">https://www.aeaweb.org/articles?id=10.1257/aer.99.4.1145</a>.
---------------------------------------------------------------------------
b. Personal Use Determined Soley by Taxpayer Intent at Time Debt Is
Incurred
The proposed regulations would provide that personal use is
determined only once, based on taxpayers' intent at the time
indebtedness is incurred. An alternative standard could have required
taxpayers to evaluate their expected use each year or document personal
use each year to continue to qualify for the deduction. A repeated
certification requirement would result in considerable compliance
burden to taxpayers, particularly among taxpayers whose vehicles will
be exclusively for personal use. The proposed regulations would benefit
taxpayers by simplifying the process of claiming the QPVLI deduction,
relative to a requirement for annual certification of sufficient
personal use.
c. Personal and Business Use Allocation
Under the proposed regulations, if a taxpayer meets the personal
use standard (more than 50 percent of expected use of an APV for
personal use), interest on the SPVL is considered QPVLI. Alternative
guidance could have required taxpayers to allocate amounts of loan
interest attributable to personal and business uses of the APV and
allowed only interest directly linked to personal use to be deducted.
The proposed rules streamline the process and reduce the compliance
burden of deducting QPVLI for taxpayers and administering the deduction
for the IRS. Many taxpayers with mixed personal and business use
vehicles already track and allocate personal and business mileage for
Federal income tax purposes. For these taxpayers, the proposed
regulations promote flexibility by allowing taxpayers who meet the
[[Page 82]]
personal use standard and all other requirements to deduct vehicle
interest solely as QPVLI or, to the extent the taxpayers have interest
properly allocable to a trade or business, as a business expense.
d. Specified Passenger Vehicle Loan (SPVL) and Further Definitions
The proposed regulations would clarify what constitutes a SPVL.
Specifically, the proposed rules provide that indebtedness qualifies as
a SPVL only if the indebtedness is incurred for the purchase of an APV
and for items and amounts customarily financed in an APV purchase
transaction and that are directly related to the purchased APV. These
items include vehicle service plans, extended warranties, and sales
taxes and vehicle-related fees. Indebtedness incurred for collision and
liability insurance or to purchase any property or services unrelated
to the APV (for example, a trailer or a boat) is not considered a SPVL.
The proposed regulations strengthen the incentive for debt financing of
the items and amounts included in the SPVL definition (such as
warranties and sales taxes), relative to a rule that excluded those
items and amounts from the SPVL definition.
Alternative guidance could have prescribed that only debt directly
attributable to the price of the vehicle is a SPVL and therefore that
only interest on that portion of a loan is deductible. Such an
alternative standard could result in substantial compliance costs to
taxpayers and to lenders and interest recipients in requiring
allocations of indebtedness and associated interest. For amounts
customarily financed together, such as the price of the vehicle itself
and sales taxes and warranties on the vehicle, identifying and
allocating which interest is attributable to which portion of total
indebtedness would be difficult and costly to administer. The proposed
guidance benefits taxpayers by removing uncertainty and reduces burden
relating to what taxpayers may consider a SPVL. According to
Autotrader, for financed vehicle purchases, ``taxes and dealer fees are
almost always included in the payment.'' \9\ A substantial share of
taxpayers with QPVLI would therefore benefit from the proposed SPVL
definition, relative to an alternative definition that would require
taxpayers to identify separately interest attributable to the price of
the vehicle and items and amounts customarily financed with the
vehicle. Relatedly, an SPVL definition limited strictly to the price of
the vehicle may also require additional information reporting that
burdens interest recipients and lenders. The proposed SPVL definition
benefits entities subject to information reporting requirements because
taxpayers can determine their QPVLI without needing information on
interest amounts related to the price of the vehicle separate from
interest amounts related to items and amounts customarily financed with
the vehicle.
---------------------------------------------------------------------------
\9\ ``Are taxes and fees included in car financing?'',
Autotrader, last accessed October 28, 2025, <a href="https://www.autotrader.com/car-shopping/financing-a-car-are-taxes-and-fees-included-in-financing-222154">https://www.autotrader.com/car-shopping/financing-a-car-are-taxes-and-fees-included-in-financing-222154</a>.
---------------------------------------------------------------------------
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
generally requires that a Federal agency obtain the approval of the
Office of Management and Budget (OMB) before collecting information
from the public, whether that collection of information is mandatory,
voluntary, or required to obtain or retain a benefit. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a valid control number
assigned by the OMB.
The general recordkeeping requirements mentioned in these proposed
regulations are considered general tax records under Sec. 1.6001-1(e).
A taxpayer would use these records to establish its eligibility for the
section 163(h)(4) deduction and the amount of the deduction claimed.
The recordkeeping requirements would include that individuals keep
records about the SPVL, the APV, and the amount of interest paid or
accrued. For PRA purposes, general tax records are already approved by
OMB under 1545-0074 for individuals and 1545-0092 for trust and estate
filers.
These proposed regulations also mention reporting requirements
related to claiming deductions as set forth in proposed Sec. 1.163-16.
These collections will be made by eligible taxpayers as part of filing
a return (such as the appropriate Form 1040 or 1041), including filling
out the relevant schedules. These forms are approved by OMB under 1545-
0074 for individuals and 1545-0092 for trust and estate filers.
These proposed regulations also include reporting, third-party
disclosure and recordkeeping requirements required under section 6050AA
as set forth in proposed Sec. 1.6050AA-1. The collections will be used
by the IRS for tax compliance purposes and by taxpayers to calculate
their deduction. The burden associated with these information
collections will be included in Form 1098-VLI and its instructions and
approved with OMB control number 1545-XXXX in accordance with PRA
procedures under 5 CFR 1320.10. The Treasury Department and the IRS
request comments on all aspects of information collection burdens
related to the proposed regulations. In addition, when available,
drafts of IRS forms are posted for comment at <a href="http://www.irs.gov/draftforms">www.irs.gov/draftforms</a>.
The likely respondents are corporations and partnerships. The
estimated burden for these requirements is as follows:
Estimated number of respondents: 35,800 respondents.
Estimated number of responses: 6,000,000 responses.
Estimated frequency of responses: Annually.
Estimated average time per response: 0.25 hours.
Estimated total annual burden hours: 1,500,000 hours.
Estimated total annual burden cost: $130,785,000.
The collections of information contained in this notice of proposed
rulemaking has been submitted to the OMB for review in accordance with
the PRA. Commenters are strongly encouraged to submit public comments
electronically. Written comments and recommendations for the proposed
information collection should be sent to <a href="http://www.reginfo.gov/public/do/PRAMain">www.reginfo.gov/public/do/PRAMain</a>, with copies to the Internal Revenue Service. Find this
particular information collection by selecting ``Currently under
Review--Open for Public Comments'' then by using the search function.
Submit electronic submissions for the proposed information collection
to the IRS via email at <a href="/cdn-cgi/l/email-protection#09797b68276a6664646c677d7a49607b7a276e667f"><span class="__cf_email__" data-cfemail="2b5b594a05484446464e455f586b425958054c445d">[email protected]</span></a> (indicate REG-113515-25 on
the Subject line). Comments on the collection of information should be
received by March 3, 2026.
Comments are specifically requested concerning: Whether the
proposed collection of information is necessary for the proper
performance of the functions of the IRS, including whether the
information will have practical utility. The accuracy of the estimated
burden associated with the proposed collection of information. How the
quality, utility, and clarity of the information to be collected may be
enhanced. How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology. Estimates of capital or start-up costs and costs of
operation, maintenance, and purchase of services to provide
information.
[[Page 83]]
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any Internal Revenue law. Generally, tax returns and
tax return information are confidential, as required by section 6103.
III. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely
to have a significant economic impact on a substantial number of small
entities. Unless an agency determines that a proposal will not have a
significant economic impact on a substantial number of small entities,
section 603 of the RFA requires the agency to present an initial
regulatory flexibility analysis (IRFA) of the proposed regulations. The
Treasury Department and the IRS have not determined whether the
proposed regulations, when finalized, will have a significant economic
impact on a substantial number of small entities. This determination
requires further study. However, because there is a possibility of a
significant economic impact on a substantial number of small entities,
these proposed regulations include an IRFA. The Treasury Department and
the IRS invite comments on both the number of entities affected by
these proposed regulations and the economic impact of these proposed
regulations on small entities.
A. Need for and Objectives of the Rule
The proposed regulations would provide the eligibility rules and
key definitions regarding the section 163(h)(4) deduction to allow
taxpayers to determine whether their interest is QPVLI eligible for the
section 163(h)(4) deduction. In addition, the proposed regulations
would provide the operational, administrative, and definitional rules
for persons in a trade or business to comply with the statutory
information reporting requirements under section 6050AA with interest
received on a SPVL.
The proposed rules are expected to clarify the OBBBA provision
regarding the car loan interest deduction, which Congress intended to
ease the financial burden of car ownership for individuals and promote
domestic manufacturing. See House Budget Committee report on the OBBBA,
H. Rept. 119-106, at 1510 (2025). The proposed rules are intended to
facilitate the easing of the financial burden of car ownership by
providing the information necessary for taxpayers to claim the
deduction. Additionally, the proposed rules are consistent with the
promotion of domestic manufacturing. The rules direct taxpayers to the
National Highway Traffic Safety Administration VIN lookup tool to help
taxpayers determine whether a vehicle had final assembly in the United
States, a necessary condition for the vehicle to be eligible for the
deduction. Because the proposed rules assist taxpayers in claiming the
deduction, the rules may also increase consumer demand for vehicles
with final assembly in the United States. Over time, this may lead
manufacturers to increase production and assembly of vehicles in the
United States in order to meet demand for vehicles that are eligible
for the deduction. Thus, the Treasury Department and the IRS intend and
expect that the proposed rules will deliver benefits across the economy
that will favorably impact individuals, vehicle dealers, and the
domestic manufacturing industry, including vehicle manufacturers.
B. Affected Small Entities
The Small Business Administration estimates in its 2023 Small
Business Profile that 99.9 percent of United States businesses meet its
definition of a small business. The applicability of these proposed
regulations does not depend on the size of the business, as defined by
the Small Business Administration. As described more fully in the
preamble to these proposed regulations and in this IRFA, these rules
may affect a variety of different businesses across several different
industries but will primarily affect dealers of new vehicles and
financial entities that would be required to file and furnish
information returns under section 6050AA.
The Treasury Department and the IRS currently estimate 35,800
businesses may be impacted by these proposed regulations because they
are car and motorcycle loan lenders. Of the estimated 35,800 car and
motorcycle loan lenders that may be impacted by these proposed
regulations, the Treasury Department and the IRS expect 24,600 would
likely be considered a small business entity. To prepare these
estimates, the Treasury Department and IRS reviewed tax return filings
for relevant industry codes for prior taxable years.
1. Impact of the Rules
The recordkeeping and reporting requirements would increase for
businesses that provide loans on new cars and motorcycles. Although the
Treasury Department and the IRS do not have sufficient data to
precisely determine the likely extent of the increased costs of
compliance, the estimated burden of complying with the recordkeeping
and reporting requirements are described in the Paperwork Reduction Act
section of the preamble. Based on the estimated number of responses
(6,000,000) and an estimate time to respond of 0.25 hours, the
estimated burden is 1,500,000 total burden hours.
2. Alternatives Considered
The Treasury Department and the IRS considered alternatives to the
proposed regulations. For example, the Treasury Department and the IRS
considered a delay to reporting for small businesses. Although this
would ease the burden on small businesses, it 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. Accordingly, the Treasury Department and the IRS decided not
to delay reporting for small businesses.
The Treasury Department and the IRS also considered whether
reporting should be required for each person from whom interest was
received. However, the Treasury Department and the IRS understand that
interest recipients do not necessarily track the identity of the person
making payments. Therefore, in order to reduce the reporting burden for
small businesses that may find this additional tracking burdensome,
these proposed regulations would define a payor of record on an SPVL as
any person carried on the books and records of the interest recipient
as the principal borrower of the SPVL.
Another alternative considered was whether reporting under section
6050AA should be limited to QPVLI. However, the Treasury Department and
the IRS understand that interest recipients do not necessarily have the
information necessary to determine whether interest on a SPVL is QPVLI
for an individual. Accordingly, to reduce the reporting burden for
small businesses that do not routinely ask individuals for information
such as the expected amount of personal use of the vehicle, these
proposed regulations propose that interest recipients report receipt of
interest received on a SPVL.
3. Duplicative, Overlapping, or Conflicting Federal Rules
The proposed regulations would not duplicate, overlap, or conflict
with any relevant Federal rules. As discussed in
[[Page 84]]
the Explanation of Provisions, the proposed regulations would merely
provide requirements, procedures, and definitions related to the
section 163(a) deduction for QPVLI and section 6050AA. The Treasury
Department and the IRS invite input from interested members of the
public about identifying and avoiding overlapping, duplicative, or
conflicting requirements.
IV. Section 7805(f)
Pursuant to section 7805(f) of the Code, these proposed regulations
will be submitted to the Chief Counsel for the Office of Advocacy of
the Small Business Administration for comment on its impact on small
business.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. These proposed regulations do not include any Federal
mandate that may result in expenditures by State, local, or Tribal
governments, or by the private sector, in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. This proposed rule does not have
federalism implications and does not impose substantial direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive order.
Comments and Public Hearing
Before the proposed regulations are adopted as final regulations,
consideration will be given to comments regarding this notice of
proposed rulemaking that are submitted timely to the IRS as prescribed
in this preamble under the ADDRESSES section. The Treasury Department
and the IRS request comments on all aspects of the proposed
regulations. All comments submitted will be available at
<a href="http://www.regulations.gov">www.regulations.gov</a>. Once submitted to the Federal eRulemaking Portal,
comments cannot be edited or withdrawn.
A public hearing has been scheduled for February 24, 2026,
beginning at 10 a.m. ET, in the Auditorium at the Internal Revenue
Building, 1111 Constitution Avenue NW, Washington, DC. Due to building
security procedures, visitors must enter at the Constitution Avenue
entrance. In addition, all visitors must present photo identification
to enter the building. Because of access restrictions, visitors will
not be admitted beyond the immediate entrance area more than 30 minutes
before the hearing starts. Participants may alternatively attend the
public hearing by telephone.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit an outline of
the topics to be discussed and the time to be devoted to each topic by
February 2, 2026. A period of 10 minutes will be allotted to each
person for making comments. An agenda showing the scheduling of the
speakers will be prepared after the deadline for receiving outlines has
passed. Copies of the agenda will be available free of charge at the
hearing. If no outline of the topics to be discussed at the hearing is
received by February 2, 2026, the public hearing will be cancelled. If
the public hearing is cancelled, a notice of cancellation of the public
hearing will be published in the Federal Register.
Individuals who want to testify in person at the public hearing
must send an email to <a href="/cdn-cgi/l/email-protection#4e3e3b2c22272d262b2f3c2720293d0e273c3d60292138"><span class="__cf_email__" data-cfemail="671712050b0e040f0206150e090014270e151449000811">[email protected]</span></a> to have your name added to
the building access list. The subject line of the email must contain
the regulation number REG-113515-25 and the language TESTIFY In Person.
For example, the subject line may say: Request to TESTIFY in Person at
Hearing for REG-113515-25.
Individuals who want to testify by telephone at the public hearing
must send an email to <a href="/cdn-cgi/l/email-protection#b5c5c0d7d9dcd6ddd0d4c7dcdbd2c6f5dcc7c69bd2dac3"><span class="__cf_email__" data-cfemail="84f4f1e6e8ede7ece1e5f6edeae3f7c4edf6f7aae3ebf2">[email protected]</span></a> to receive the telephone
number and access code for the hearing. The subject line of the email
must contain the regulation number REG-113515-25 and the language
TESTIFY Telephonically. For example, the subject line may say: Request
to TESTIFY Telephonically at Hearing for REG-113515-25.
Individuals who want to attend the public hearing in person without
testifying must also send an email to <a href="/cdn-cgi/l/email-protection#611114030d080209040013080f0612210813124f060e17"><span class="__cf_email__" data-cfemail="324247505e5b515a5753405b5c5541725b40411c555d44">[email protected]</span></a> to have
your name added to the building access list. The subject line of the
email must contain the regulation number REG-113515-25 and the language
ATTEND In Person. For example, the subject line may say: Request to
ATTEND Hearing In Person for REG-113515-25. Requests to attend the
public hearing must be received by 5:00 p.m. ET on February 20, 2026.
Individuals who want to attend the public hearing by telephone
without testifying must also send an email to <a href="/cdn-cgi/l/email-protection#e09095828c898388858192898e8793a0899293ce878f96"><span class="__cf_email__" data-cfemail="5b2b2e39373238333e3a2932353c281b322928753c342d">[email protected]</span></a> to
receive the telephone number and access code for the hearing. The
subject line of the email must contain the regulation number REG-
113515-25 and the language ATTEND Hearing Telephonically. For example,
the subject line may say: Request to ATTEND Hearing Telephonically for
REG-113515-25. Requests to attend the public hearing must be received
by 5:00 p.m. ET on February 20, 2026.
Hearings will be made accessible to people with disabilities. To
request special assistance during a hearing, please contact the
Publications and Regulations Section of the Office of Associate Chief
Counsel (Procedure and Administration) by sending an email to
<a href="/cdn-cgi/l/email-protection#f5858097999c969d9094879c9b9286b59c8786db929a83"><span class="__cf_email__" data-cfemail="671712050b0e040f0206150e090014270e151449000811">[email protected]</span></a> (preferred) or by telephone at (202) 317-6901
(not a toll-free number) by February 19, 2026.
Statement of Availability of IRS Documents
Guidance cited in this preamble is published in the Internal
Revenue Bulletin and is available from the Superintendent of Documents,
U.S. Government Publishing Office, Washington, DC 20402, or by visiting
the IRS website at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Drafting Information
The principal author of these proposed regulations is Riston
Escher, Office of the Associate Chief Counsel (Income Tax &
Accounting), IRS. However, other personnel from the Treasury Department
and the IRS participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Excise taxes, Income taxes, Penalties, Reporting
and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR parts 1 and 301 as follows:
[[Page 85]]
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry in numerical order for Sec. 1.6050AA-1 to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.6050AA-1 is also issued under 26 U.S.C. 6050AA(e).
* * * * *
0
Par. 2. Section 1.163-16 is added to read as follows:
Sec. 1.163-16 Qualified passenger vehicle loan interest.
(a) Overview--(1) In general. In computing the taxable income for a
taxable year beginning after December 31, 2024, and before January 1,
2029, of a taxpayer described in paragraph (a)(2) of this section, for
purposes of the deduction allowable under section 163(a) of the
Internal Revenue Code (Code) for interest paid or accrued within the
taxable year on indebtedness, section 163(h)(4) excludes qualified
passenger vehicle loan interest (QPVLI) (as defined in section
163(h)(4)(B) and paragraph (b)(12) of this section) from the definition
of ``personal interest'' paid or accrued during the taxable year for
which a deduction would be disallowed under section 163(h)(1). See
paragraph (b) of this section for definitions of terms used in section
163(h)(4) and this section.
(2) Taxpayers that may deduct QPVLI--(i) In general. Only a
taxpayer that is an individual, decedent's estate, or non-grantor trust
may deduct QPVLI in computing the taxpayer's taxable income.
(ii) Deduction available without regard to whether taxpayer
itemizes deductions. Under section 63(b)(7) of the Code, the deduction
for QPVLI allowable under section 163(h)(4) may be taken by a taxpayer
without regard to whether the taxpayer itemizes deductions or takes the
standard deduction.
(b) Definitions. The following definitions apply for purposes of
section 163(h)(4) and this section:
(1) Applicable passenger vehicle (APV). The term applicable
passenger vehicle or APV means a vehicle that satisfies the
requirements of paragraph (e)(1) of this section.
(2) Dealer. The term dealer means a person licensed by a State, the
District of Columbia, the Commonwealth of Puerto Rico, any other
territory or possession of the United States, an Indian Tribal
government (as defined in section 7701(a)(40) of the Code), or an
Alaska Native Corporation (as defined in section 3 of the Alaska Native
Claims Settlement Act (43 U.S.C. 1602(m)) to engage in the sale of
vehicles. This term includes a dealer licensed by any jurisdiction that
makes sales at sites outside of the jurisdiction in which it is
licensed.
(3) Final assembly. The term final assembly means the process by
which a manufacturer produces a vehicle at, or through the use of, a
plant, factory, or other place from which the vehicle is delivered to a
dealer with all component parts necessary for the mechanical operation
of the vehicle included with the vehicle, whether or not the component
parts are permanently installed in or on the vehicle.
(4) Grantor trust. A grantor trust is any portion of a trust that
is treated as being owned by one or more persons under sections 671
through 679 of the Code.
(5) Independently deductible interest. The term independently
deductible interest means interest that satisfies the requirements of
paragraph (g)(1) of this section.
(6) Lease financing. The term lease financing means a transaction
that is not a purchase of an APV, and under which a taxpayer has usage
rights with respect to an APV but is not considered the owner of the
APV under State or other applicable law.
(7) Modified adjusted gross income--(i) Individuals. The term
modified adjusted gross income, in the case of an individual, means
adjusted gross income (as defined in section 62 of the Code) increased
by any amount excluded from gross income under sections 911, 931, or
933 of the Code.
(ii) Decedents' estates and non-grantor trusts. The term modified
adjusted gross income, in the case of a decedent's estate or non-
grantor trust, means adjusted gross income as defined in section 67(e)
of the Code.
(8) Negative equity. The term negative equity means 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 specified by the contract for the purchase of the APV.
(9) Non-grantor trust. The term non-grantor trust means a trust (or
the portion of a trust) that is not a grantor trust.
(10) Personal use. The term personal use means use by an individual
other than in any trade or business (except for the use in the trade or
business of performing services as an employee), or for the production
of income.
(11) Purchase. The term purchase means an acquisition that is both
an acquisition of a vehicle for Federal income tax purposes and the
acquisition of the title of the vehicle for purposes of State or other
applicable law.
(12) Qualified passenger vehicle loan interest (QPVLI). The term
qualified passenger vehicle loan interest or QPVLI means any interest
that satisfies the requirements of paragraph (c)(1) of this section.
(13) Qualified vehicle classification--(i) In general. The term
qualified vehicle classification means one of the following vehicle
classifications:
(ii) Car. The term car means a vehicle classified in one of the
classes of passenger vehicles listed in 40 CFR 600.315-08(a)(1), or
otherwise so classified by the Administrator of the EPA under 40 CFR
600.315-08(a).
(iii) Minivan. The term minivan means a vehicle classified as a
minivan under 40 CFR 600.315-08(a)(2)(iv), or otherwise so classified
by the Administrator of the EPA under 40 CFR 600.315-08(a).
(iv) Van. The term van means a vehicle classified as a van under 40
CFR 600.315-08(a)(2)(iii), or otherwise so classified by the
Administrator of the EPA under 40 CFR 600.315-08(a).
(v) Sport utility vehicle. The term sport utility vehicle means a
vehicle classified as a small sport utility vehicle or standard sport
utility vehicle under 40 CFR 600.315-08(a)(2)(v) and (vi), or otherwise
so classified by the Administrator of the EPA under 40 CFR 600.315-
08(a).
(vi) Pickup truck. The term pickup truck means a vehicle classified
as a small pickup truck or standard pickup truck under 40 CFR 600.315-
08(a)(2)(i) and (ii), or otherwise so classified by the Administrator
of the EPA under 40 CFR 600.315-08(a).
(vii) Motorcycle. The term motorcycle means a vehicle classified as
a motorcycle under 40 CFR 86.402-78, or otherwise so classified by the
Administrator of the EPA.
(14) Secured by a first lien. The term secured by a first lien
means a valid and enforceable security interest under State or other
applicable law in an APV with status ahead of all other security
interests, other than tax liens or other similar security interests
that may be given higher priority at a later date following the date of
purchase and only in limited circumstances.
(15) Specified passenger vehicle loan (SPVL). The term specified
passenger vehicle loan or SPVL means indebtedness that satisfies the
requirements of paragraph (d)(1) of this section.
(16) Vehicle identification number (VIN). The term vehicle
identification number or VIN means a series of Arabic
[[Page 86]]
numbers and Roman letters that is assigned to a motor vehicle for
identification purposes under 49 CFR 565.13.
(c) Qualified passenger vehicle loan interest (QPVLI)--(1) In
general. Interest is QPVLI only if the interest 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
(as described in paragraphs (c)(4) and (5) of this section).
(2) Determining the amount of interest paid or accrued during a
taxable year--(i) In general. Interest on an SPVL accrues on a daily
basis over the term of the SPVL. The amount of QPVLI that is deductible
by a taxpayer for the taxable year is determined under the taxpayer's
overall method of accounting for Federal income tax purposes (either
the cash receipts and disbursements method or an accrual method) or an
applicable special method of accounting. For purposes of section
163(h)(4), the amount of QPVLI includes all interest payable with
respect to the amount financed under an SPVL (that is, the amount of
indebtedness that qualifies for purposes of determining whether
indebtedness is an SPVL under paragraph (d)(2) of this section).
(ii) Allocation of payments. In general, a payment on an SPVL is
treated first as a payment of interest to the extent interest has
accrued and remains unpaid on the SPVL as of the date the payment is
due, and second, to the extent of any excess, as a payment of
principal. See Sec. Sec. 1.446-2(e) and 1.1275-2(a) for rules on
allocating payments between interest and principal. For purposes of
this paragraph (c)(2)(ii), a simple interest calculation may be used to
determine the amount of interest that has accrued and remains unpaid on
an SPVL when a payment on the SPVL is made. Under this simple interest
calculation, interest accrues daily over the term of the SPVL based on
its outstanding principal balance and the annual percentage rate or
interest rate provided in the retail installment sales contract or
other contract evidencing the SPVL.
(3) Determining whether the SPVL is secured by a first lien on an
APV--(i) In general. In order for interest paid or accrued on an SPVL
to be QPVLI, the SPVL must be secured by a first lien (as defined in
paragraph (b)(14) of this section) on the APV financed by the SPVL at
the time the interest is paid or accrued.
(ii) Exception for substitute vehicle due to unforeseen intervening
event. In the case of an SPVL secured by a first lien on an APV that is
replaced at a later time with a substitute vehicle that is an APV due
to an unforeseen intervening event (for example, a defective APV is
required to be replaced under State or other applicable law or an APV
is required to be replaced under an insurance product), and as a result
the SPVL is secured by a first lien on that substitute vehicle, the
substitute vehicle is considered the initially purchased APV for
purposes of this paragraph (c)(3) and for purposes of paragraph (c)(5)
of this section.
(4) Interest that is not QPVLI. QPVLI does not include any amount
paid or accrued on any of the following:
(i) A loan to finance fleet sales.
(ii) A loan incurred for the purchase of a commercial vehicle that
is not used for personal purposes.
(iii) Any lease financing.
(iv) A loan to finance the purchase of a vehicle with a salvage
title.
(v) A loan to finance the purchase of a vehicle intended to be used
for scrap or parts.
(5) VIN requirement. Interest paid or accrued by the taxpayer
during the taxable year on an SPVL is not treated as QPVLI and may not
be deducted under section 163(h)(4) unless the taxpayer reports the VIN
of the purchased APV on the Federal tax return for the taxable year in
the manner prescribed by the Internal Revenue Service in guidance
published in the Internal Revenue Bulletin or in forms and
instructions.
(6) Examples. The rules of paragraphs (c)(1), (c)(3) and
(c)(4)(iii) of this section are illustrated by the following examples:
(i) Example 1: Lease financing--(A) Facts. Dealer is located in
State Y. Dealer purchases an APV from the manufacturer and sells the
car to Leasing Company. Leasing Company leases the car to A for a 120-
month period in a transaction that is a lease for State Y purposes. At
the end of the lease term, A has the option to purchase the car for a
nominal amount. For Federal income tax purposes, the lease agreement is
properly viewed as a sale. A makes lease payments during the taxable
year.
(B) Analysis. A's lease payments are made under a lease financing
transaction and do not qualify as QPVLI. Additionally, notwithstanding
that the lease agreement is properly viewed as a sale for Federal
income tax purposes, the transaction is not a purchase (as defined in
paragraph (b)(11) of this section) and therefore the lease is not an
SPVL. Accordingly, no amounts paid under the lease are QPVLI.
(ii) Example 2: Defective vehicle replaced--(A) Facts. A, a
resident of State X, incurs an SPVL to purchase Vehicle 1. The SPVL is
secured by a first lien on Vehicle 1. After purchase, A discovers
Vehicle 1 is defective. Under State X law that requires the replacement
of new vehicles with serious defects, the manufacturer replaces
defective Vehicle 1 with Vehicle 2. As a result, the SPVL is secured by
a first lien on Vehicle 2. Vehicle 2 is an APV with respect to A, as
the original use of Vehicle 2 commences with A, and the vehicle meets
all other requirements of an APV as described in paragraph (e) of this
section. The SPVL continues to be in effect with no changes other than
the substitution of Vehicle 1 for Vehicle 2 occurring under State X
law. A continues making payments under the terms of the SPVL.
(B) Analysis. The interest paid or accrued on the SPVL that is now
secured by Vehicle 2 is QPVLI. The SPVL is secured by a first lien on
the APV that was purchased as a result of the incurred SPVL at the time
that interest is paid or accrued. As Vehicle 1 was replaced with
Vehicle 2, an APV, due to an unforeseen intervening event and the SPVL
is secured by a first lien on Vehicle 2, Vehicle 2 is considered the
initially purchased APV.
(d) Specified passenger vehicle loan (SPVL)--(1) In general.
Indebtedness is an SPVL only if the indebtedness is incurred by the
taxpayer after December 31, 2024, for the purchase of an APV for
personal use, and is secured by a first lien on that APV.
(2) Indebtedness incurred for the purchase of an APV--(i) In
general. For purposes of paragraph (d)(1) of this section, indebtedness
is an SPVL only to the extent the indebtedness is incurred for the
purchase of an APV and, if part of the same purchase transaction, for
any other items or amounts customarily financed in an APV purchase
transaction and that are directly related to the purchased APV. Items
or amounts customarily financed in an APV purchase transaction and that
are directly related to the purchased APV include, for example, vehicle
service plans, extended warranties, sales taxes, and vehicle-related
fees.
(ii) Indebtedness that is not incurred for the purchase of an APV.
To the extent any indebtedness is not incurred by a taxpayer for the
purchase of an APV or for any other items or amounts customarily
financed in an APV purchase transaction that are directly related to
the purchased APV, such indebtedness is not an SPVL even if it is
incurred as part of a purchase transaction for an APV. For example,
indebtedness incurred for the
[[Page 87]]
repayment of negative equity on a loan secured by a trade-in vehicle,
to purchase collision and liability insurance, or to purchase any
property or services unrelated to an APV (for example, a trailer or a
boat) is not incurred by a taxpayer for the purchase of an APV or for
any other items or amounts customarily financed in an APV purchase
transaction that are directly related to the purchased APV, and as a
result is not an SPVL. In addition, indebtedness is not incurred by a
taxpayer for the purchase of an APV or for any other items or amounts
customarily financed in an APV purchase transaction and that are
directly related to the purchased APV to the extent the indebtedness
relates to cash proceeds that the taxpayer receives from the lender.
(iii) Allocation of indebtedness--(A) In general. Except as
provided in paragraph (d)(2)(iii)(B) of this section, if a taxpayer
incurs indebtedness described in both paragraphs (d)(2)(i) and (ii) of
this section as part of the same transaction, the indebtedness must be
allocated between the indebtedness described in paragraph (d)(2)(i) of
this section and the indebtedness described in paragraph (d)(2)(ii) of
this section. Only the portion of the indebtedness allocated to the
indebtedness described in paragraph (d)(2)(i) of this section is an
SPVL. In such cases, payments of interest and principal are allocated
to the portion of the indebtedness described in paragraph (d)(2)(i) of
this section and the portion of the indebtedness described in paragraph
(d)(2)(ii) of this section on a pro rata basis.
(B) Allocation of down payment. For purposes of determining the
portion of the indebtedness described in paragraph (d)(2)(ii) of this
section, any down payment (or other consideration provided by the
taxpayer at the time of the purchase transaction for an APV) is applied
first against any negative equity and any other amounts that are not
incurred for the purchase of the APV or for other items customarily
financed in an APV purchase transaction and that directly relate to the
purchase of the APV.
(3) Related party indebtedness. Any indebtedness owed to a person
who is related to the taxpayer within the meaning of section 267(b) or
section 707(b)(1) of the Code is not an SPVL.
(4) Refinancing of an SPVL. If a taxpayer refinances an SPVL
(refinanced loan), the resulting indebtedness (new loan) is an SPVL if
the new loan is secured by a first lien on the APV with respect to
which the refinanced loan was incurred. The amount of the new loan that
is an SPVL is limited to the outstanding balance of the refinanced loan
as of the date of the refinancing. A taxpayer allocates principal and
interest between the amount of the new loan that is an SPVL and the
remaining portion of the indebtedness on a pro rata basis. For purposes
of this paragraph (d)(4), if there is a change in obligor as part of
the refinancing, the new loan is not an SPVL with regard to any
subsequent obligor unless the refinancing is in connection with a
change in obligor by reason of the obligor's death within the meaning
of paragraph (d)(5)(ii) of this section.
(5) Whether the SPVL was incurred by the taxpayer--(i) In general.
Except as provided in paragraph (d)(5)(ii) of this section,
indebtedness is an SPVL only if that indebtedness was originally
incurred by the taxpayer. For example, if an individual incurs an SPVL
and subsequently ceases to be an obligor and another individual becomes
the obligor on the indebtedness, the indebtedness is not an SPVL with
respect to the other individual.
(ii) Exception for a change in obligor by reason of the death of an
obligor--(A) In general. If a change in obligor is by reason of the
death of an obligor of an SPVL, then the indebtedness is treated as an
SPVL with respect to the new obligor.
(B) Change in obligor by reason of the death of an obligor. For
purposes of paragraph (d)(5)(ii)(A) of this section, a change in
obligor by reason of death includes the following:
(1) The succession to ownership of an APV subject to an SPVL by--
(i) The deceased obligor's estate;
(ii) A surviving joint owner of the APV; or
(iii) The surviving beneficiary designated by contract, a transfer
on death provision, or by operation of law.
(2) A distribution of an APV subject to an SPVL by--
(i) A deceased obligor's estate to a legatee or heir; or
(ii) A trust that is made to a trust beneficiary by reason of death
as described in this paragraph (d)(5)(ii).
(3) Any refinancing of an SPVL in connection with a transfer by
reason of death as described in this paragraph (d)(5)(ii).
(C) Not a change in obligor by reason of the death of an obligor. A
change in obligor by reason of death as described in this paragraph
(d)(5)(ii) does not include changes resulting from the following:
(1) A sale, exchange, or other disposition of an APV by a
decedent's estate or trust, other than a distribution described in
paragraph (d)(5)(ii)(B)(2) of this section.
(2) Any disposition of an APV by an individual who received the APV
by reason of death (unless that disposition is by reason of that
individual's death and the change in obligor is described in paragraph
(d)(5)(ii)(B) of this section).
(6) Examples. The rules of paragraphs (d)(2) and (4) of this
section are illustrated by the following examples in which A is an
individual who incurs indebtedness to purchase an APV for personal use:
(i) Example 1: Vehicle-related purchases--(A) Facts. A finances the
purchase of an APV for personal use by incurring a loan. The loan is
secured by a first lien on the APV. The retail installment sales
contract, which evidences the loan, indicates that the total amount
financed is equal to the sum of the APV purchase price, the cost for an
extended warranty, sales tax, title and registration fees, and a dealer
document fee.
(B) Analysis. 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 within the meaning of paragraph (d)(2)(i) of this
section. Accordingly, the loan is an SPVL and all of the interest on
the loan may be deductible as QPVLI.
(ii) Example 2: Non-vehicle-related purchase--(A) Facts. A incurs
indebtedness to finance the purchase of both an APV and a trailer. The
indebtedness is secured by a first lien on the APV. The price of the
trailer is added to the amount financed as part of the retail
installment sales contract that includes the purchase price of the APV.
(B) Analysis. The indebtedness attributable to the purchase price
of the trailer included in the amount financed under the retail
installment sales contract is not incurred for the purchase of an APV
or for any other items or amounts customarily financed in an APV
purchase transaction and that directly relate to the purchased APV
within the meaning of paragraph (d)(2)(i) of this section and therefore
this indebtedness is not included in an SPVL under paragraph (d)(2)(ii)
of this section. In accordance with the allocation rules in paragraph
(d)(2)(iii) of this section, A must allocate the portion of the
indebtedness that is allocable to the purchase price of the trailer to
indebtedness described in paragraph (d)(2)(ii) of this section that is
not an SPVL. Thus, none of the interest that is attributable to that
portion of the indebtedness is QPVLI. The remaining
[[Page 88]]
portion of the indebtedness is allocated to indebtedness described in
paragraph (d)(2)(i) of this section that is an SPVL.
(iii) Example 3: Vehicle refinanced--(A) Facts. A incurs
indebtedness (Loan 1) to finance the purchase of an APV, and in a
subsequent taxable year in which A is eligible to deduct QPVLI, A
refinances Loan 1 by incurring new indebtedness of $38,000 (Loan 2),
which is secured by a first lien on the APV. At the time of
refinancing, the APV has a fair market value of $38,000 and Loan 1 has
an outstanding balance of $30,000. The Loan 2 proceeds of $38,000 are
used to first repay the $30,000 Loan 1 balance, with the remaining
$8,000 going to A as cash proceeds.
(B) Analysis. Of the $38,000 amount financed by Loan 2, $8,000 is
the amount of the resulting indebtedness that exceeds the amount of
such refinanced indebtedness within the meaning of paragraph (d)(4) of
this section. Only $30,000 of the $38,000 balance of Loan 2 is an SPVL
per the rule in paragraph (d)(4) of this section. Thus, none of the
interest attributable to the $8,000 portion of Loan 2 is interest that
is deductible as QPVLI.
(iv) Example 4: Negative equity and down payment--(A) Facts. A
finances the purchase of an APV that costs $40,000, and trades in a
previously owned vehicle subject to an existing vehicle loan with
$6,000 of negative equity. A makes a down payment of $4,000 as part of
the APV purchase transaction, incurring indebtedness of $42,000
($40,000 plus $6,000 minus $4,000).
(B) Analysis. The $6,000 of negative equity is not an item or
amount customarily financed in an APV purchase transaction that is
directly related to the purchased APV within the meaning of paragraph
(d)(2)(i) of this section. In accordance with the allocation rules in
paragraph (d)(2)(iii) of this section, A must allocate the $42,000 of
indebtedness between indebtedness described in paragraph (d)(2)(i) of
this section and indebtedness described in paragraph (d)(2)(ii) of this
section. For purposes of determining the portion of the indebtedness
described in paragraph (d)(2)(ii) of this section, the down payment of
$4,000 is allocated against the $6,000 of negative equity. As a result,
of the $42,000 of indebtedness incurred by A, $40,000 of the
indebtedness incurred is indebtedness incurred for the purchase of an
APV as described in paragraph (d)(2)(i) of this section and $2,000 is
indebtedness not incurred for the purchase of an APV as described in
paragraph (d)(2)(ii) of this section.
(e) Applicable passenger vehicle (APV)--(1) In general. A vehicle
is an APV only if--
(i) The original use of the vehicle commences with the taxpayer (as
described in paragraph (e)(2)(i) of this section);
(ii) The vehicle is manufactured primarily for use on public
streets, roads, and highways (not including a vehicle operated
exclusively on a rail or rails);
(iii) The vehicle has at least 2 wheels;
(iv) The vehicle is in a qualified vehicle classification (as
defined in paragraph (b)(13) of this section);
(v) The vehicle is treated as a motor vehicle for purposes of title
II of the Clean Air Act;
(vi) The vehicle has a gross vehicle weight rating of less than
14,000 pounds; and
(vii) The final assembly (as defined in paragraph (b)(3) of this
section) of the vehicle occurs within the United States (as described
in paragraph (e)(3) of this section).
(2) Determining whether original use commences with the taxpayer--
(i) In general. Original use of a vehicle commences with the first
person that takes delivery of the vehicle after the vehicle is sold,
registered, or titled. In the case of a dealer, original use of a
vehicle does not commence with the dealer unless the dealer registers
or titles the vehicle. In the case of a purchaser that is not a dealer
and that incurs indebtedness to purchase a vehicle, original use of the
vehicle does not commence with that purchaser unless the vehicle is
treated as a new vehicle under the loan documentation.
(ii) Vehicle return exception. If a purchaser that is not a dealer
returns a vehicle to a seller within 30 days of taking delivery of the
vehicle, then that purchaser will not be considered the first person
that takes delivery of the vehicle after the vehicle is sold,
registered, or titled for purposes of paragraph (e)(2)(i) of this
section, and, accordingly, original use of the vehicle does not
commence with that purchaser.
(iii) Examples. The rules of paragraphs (e)(1)(i) and (e)(2) of
this section are illustrated by the following examples:
(A) Example 1: Demonstrator vehicles registered and titled in
dealer's name--(1) Facts. Dealer operates in State X. Dealer purchases
and takes delivery of a new vehicle from the manufacturer and
designates this vehicle as a demonstrator vehicle. State X law requires
a dealer to title and register the vehicle in its name. Accordingly,
Dealer titles and registers the vehicle in its name and uses the
vehicle as a demonstrator vehicle.
(2) Analysis. Original use of the vehicle commences with Dealer.
Dealer is the first person that takes delivery of the vehicle after it
is sold, registered, or titled. Accordingly, the vehicle will not be
considered an APV by a subsequent purchaser of the vehicle, and
interest paid or accrued by a subsequent purchaser on indebtedness
incurred for the purchase of the vehicle is not QPVLI.
(B) Example 2: Demonstrator vehicles not registered and titled in
dealer's name--(1) Facts. The facts are the same as in paragraph
(e)(2)(iii)(A) of this section (Example 1), except that Dealer operates
in State Y. State Y law does not require a dealer to title and register
a demonstrator vehicle in its name. Accordingly, Dealer does not title
and register the vehicle in its name and uses the vehicle as a
demonstrator vehicle.
(2) Analysis. Original use of the vehicle does not commence with
Dealer. Dealer is not the first person that takes delivery of the
vehicle after it is sold, registered, or titled. Original use of the
vehicle may commence with a subsequent purchaser of the vehicle if the
vehicle is treated as a new vehicle under the loan documentation for
the loan incurred by that subsequent purchaser to purchase the vehicle.
(C) Example 3: Cancelled sale--(1) Facts. A, an individual, enters
into a contract to purchase a special-order vehicle from a dealer in
State Z that is estimated to be delivered in one month. State Z law
provides that the vehicle is not required to be titled and registered
until A takes delivery of the vehicle. A cancels the order under the
sales contract prior to the delivery occurring.
(2) Analysis. Original use of the vehicle does not commence with A.
A is not the first person that takes delivery of the vehicle after it
is sold, registered, or titled. Original use of the vehicle may
commence with a subsequent purchaser of the vehicle if the vehicle is
treated as a new vehicle under the loan documentation for the loan
incurred by that subsequent purchaser to purchase the vehicle.
(D) Example 4: Vehicle purchase following a lease--(1) Facts.
Dealer purchases and takes delivery of a new vehicle from the
manufacturer for resale. Dealer does not register or title the vehicle
and sells the vehicle to Leasing Company. After taking delivery of the
vehicle, Leasing Company titles and registers the vehicle in its name.
Leasing Company leases the car to A, an individual. At the end of the
lease term, A exercises its option to purchase the car under its lease
agreement.
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(2) Analysis. Original use of the vehicle does not commence with A.
Original use of the vehicle commences with Leasing Company. Leasing
Company is the first person that takes delivery of the vehicle after it
is sold, registered, or titled. Original use does not commence with
Dealer because Dealer did not register or title the vehicle.
(E) Example 5: Returned vehicle--(1) Facts. A is a retail purchaser
that purchases a vehicle from Dealer. A returns the car to Dealer 15
days after taking delivery of the vehicle.
(2) Analysis. Original use of the vehicle does not commence with A.
Because A returned the vehicle to Dealer within 30 days of taking
delivery of the vehicle, A is not considered to be the first person
that takes delivery of the vehicle after it is sold, registered, or
titled and therefore original use does not commence with A. Original
use of the vehicle may commence with a subsequent purchaser of the
vehicle if the vehicle is treated as a new vehicle under the loan
documentation for the loan incurred by that subsequent purchaser to
purchase the vehicle.
(3) Determining whether final assembly has occurred within the
United States. To determine whether the final assembly of a vehicle
occurred within the United States, a taxpayer may rely on--
(i) The vehicle's plant of manufacture as reported in the VIN; or
(ii) The final assembly point reported on the label affixed to the
vehicle as described in 49 CFR 583.5(a)(3).
(f) Determination of personal use--(1) In general. A taxpayer that
incurs indebtedness to purchase an APV is considered to purchase that
APV for personal use if, at the time the indebtedness is incurred, that
taxpayer expects that the APV will be used for personal use by the
taxpayer, the taxpayer's spouse, or an individual that is related to
the taxpayer within the meaning of section 152(c)(2) or (d)(2) of the
Code, or any combination of these individuals, for more than 50 percent
of the time. The taxpayer's intent is determined based on the expected
use during the period the taxpayer expects to own the APV.
(2) Special rules for decedents' estates and non-grantor trusts.
For purposes of determining whether a decedent's estate or non-grantor
trust that incurs indebtedness to purchase an APV expects that the APV
will be used for personal use under paragraph (f)(1) of this section,
the determination is based on the expected personal use by one or more
of the legatees or heirs, or beneficiaries, respectively, who have a
present or future interest in that decedent's estate or non-grantor
trust; the spouse of a legatee, heir, or beneficiary; or an individual
that is related to a legatee, heir, or beneficiary within the meaning
of section 152(c)(2) or (d)(2).
(3) Examples. The rules of this paragraph (f) are illustrated by
the following examples in which A is an individual:
(i) Example 1: Predominant personal use--(A) Facts. At the time A
incurs indebtedness to purchase an APV, A expects to use the APV for
A's personal use for 85 percent of the time. A expects to use the APV
to earn income as a driver for a rideshare service for the remaining 15
percent of the time.
(B) Analysis. A is considered to have purchased the APV for
personal use. At the time A purchases the APV, A expects that the APV
will be used for personal use more than 50 percent of the time. A's
intention to use the APV to earn income as a driver for a rideshare
service for 15% of the time does not preclude A from being considered
to have purchased the APV for personal use.
(ii) Example 2: Predominant business use--(A) Facts. At the time A
incurs indebtedness to purchase an APV, A expects to use the APV in A's
contracting business that is a sole proprietorship for 60 percent of
the time. A expects to use the APV for A's personal use for the
remaining 40% of the time.
(B) Analysis. A is not considered to have purchased the APV for
personal use. At the time A purchases an APV, A does not expect that
the APV will be used for personal use more than 50 percent of the time.
(iii) Example 3: Personal use by an individual related to
taxpayer--(A) Facts. At the time A incurs indebtedness to purchase an
APV, A expects the APV to be used exclusively for personal use by A's
child B.
(B) Analysis. A is considered to have purchased the APV for
personal use. At the time A purchases the APV, A expects that the APV
will be used for personal use more than 50 percent of the time by B, an
individual that is related to A within the meaning of section 152(c)(2)
or (d)(2).
(g) Independently deductible interest--(1) In general.
Independently deductible interest is limited to interest that is QPVLI
determined under section 163(h)(4)(B)(i) (prior to the application of
the dollar limitation of section 163(h)(4)(C)(i) described in paragraph
(h)(1) of this section and determined without regard to this paragraph
(g)) and that is otherwise deductible by the taxpayer as a different
type of interest under section 163(a) or a different section of the
Code.
(2) Deducting independently deductible interest. A taxpayer may
deduct independently deductible interest paid or accrued by the
taxpayer during the taxable year as QPVLI (subject to the application
of the dollar limitation of section 163(h)(4)(C)(i) described in
paragraph (h)(1) of this section), or alternatively, as a different
type of interest described in paragraph (g)(1) of this section (non-
QPVLI), subject to any applicable limitations. The amount of
independently deductible interest that may be deductible as QPVLI for a
taxable year (before the application of the dollar limitation of
section 163(h)(4)(C)(i) described in paragraph (h)(1) of this section)
is reduced to the extent that the taxpayer deducts that independently
deductible interest as non-QPVLI.
(3) Reporting independently deductible interest. If a taxpayer
deducts independently deductible interest in a taxable year as non-
QPVLI under paragraph (g)(2) of this section, the taxpayer must report
information relating to that independently deductible interest in the
manner prescribed by the Internal Revenue Service in guidance published
in the Internal Revenue Bulletin or in forms and instructions.
(4) Examples. The rules of this paragraph (g) regarding
independently deductible interest are illustrated by the following
examples in which A is an individual:
(i) Example 1: Independently deductible interest--(A) Facts. During
the taxable year, A paid $1,000 of interest on an SPVL that may be
deductible by A as $1,000 of QPVLI. During the taxable year, 40 percent
of the use of the APV is attributable to A's trade or business. A may
deduct the full $1,000 as QPVLI after considering the application of
the modified adjusted gross income phaseout in paragraph (h)(2) of this
section as A's modified adjusted gross income is less than $100,000.
(B) Analysis. $400 (40% of $1,000) is independently deductible
interest because this amount is deductible as QPVLI and as business
interest under section 163(a). Assume A may deduct the full $400 as
business interest after considering any applicable limitations. A may
deduct the interest paid on the SPVL in multiple ways including--
(1) A may deduct this $400 of interest as QPVLI. In this case, A
would deduct all $1,000 of interest as QPVLI; or
(2) A may deduct this $400 as business interest. In this case, A
would
[[Page 90]]
deduct $600 as QPVLI and $400 as business interest, because A 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. Additionally, A
must report information relating to that independently deductible
interest in the manner prescribed by the Internal Revenue Service in
guidance published in the Internal Revenue Bulletin or in forms and
instructions.
(ii) Example 2: QPVLI limited by dollar limitation--(A) Facts.
During the taxable year, A paid $12,000 of interest on an SPVL. During
the taxable year, 30 percent of the use of the APV is attributable to
A's trade or business. A may deduct up to $10,000 of the interest as
QPVLI after considering the application of the dollar limitation and
the modified adjusted gross income phaseout in paragraphs (h)(1) and
(2) of this section as A's modified adjusted gross income is less than
$100,000.
(B) Analysis. $3,600 (30% of $12,000) is independently deductible
interest because this amount is deductible as QPVLI and as business
interest under section 163(a). Assume A may deduct the full $3,600 as
business interest after considering any applicable limitations. A may
deduct the interest paid on the SPVL in multiple ways including--
(1) A may maximize QPVLI deducted. A may deduct $10,000 of interest
as QPVLI, and deduct the remaining $2,000 as business interest.
Additionally, A must report information relating to that independently
deductible interest in the manner prescribed by the Internal Revenue
Service in guidance published in the Internal Revenue Bulletin or in
forms and instructions; or
(2) A may maximize business interest deducted. A may deduct $3,600
of business interest, and the remaining $8,400 as QPVLI. A has $12,000
of interest paid on an SPVL and must reduce that by the amount of
independently deductible interest of the taxpayer deducts as business
interest ($3,600). Additionally, A must report information relating to
that independently deductible interest in the manner prescribed by the
Internal Revenue Service guidance published in the Internal Revenue
Bulletin or in forms and instructions.
(iii) Example 3: QPVLI limited by dollar limitation--(A) Facts.
During the taxable year, A paid $15,000 of interest on an SPVL. During
the taxable year, 20 percent of the use of the APV is attributable to
A's trade or business. A may deduct up to $10,000 of the interest as
QPVLI after considering the application of the dollar limitation and
the modified adjusted gross income phaseout in paragraphs (h)(1) and
(2) of this section as A's modified adjusted gross income is less than
$100,000.
(B) Analysis. $3,000 (20% of $15,000) is independently deductible
interest because this amount is deductible as QPVLI and as business
interest under section 163(a). Assume A may deduct the full $3,000 as
business interest after considering any applicable limitations.
Therefore, the $3,000 is deductible as business interest or as QPVLI.
If A were to deduct the $3,000 of independently deductible interest as
QPVLI, the application of the dollar limitation in paragraph (h)(1) of
this section would limit A's deduction to $10,000 of the $15,000 as
QPVLI. Instead, A may deduct $3,000 of interest as business interest
and deduct $10,000 as QPVLI as the modified adjusted gross income
phaseout in paragraph (h)(2) of this section does not reduce A's QPVLI
deduction amount. Additionally, A must report information relating to
that independently deductible interest in the manner prescribed by the
Internal Revenue Service in guidance published in the Internal Revenue
Bulletin or in forms and instructions.
(h) Limitations--(1) Dollar limitation. The amount taken into
account as QPVLI by a taxpayer for any taxable year may not exceed
$10,000 per Federal tax return regardless of filing status.
(2) Modified adjusted gross income phaseout. The amount taken into
account as QPVLI (after the application of the dollar limitation in
paragraph (h)(1) of this section) is reduced (but not below zero) 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, in the case of a joint Federal income tax return, by which
the modified adjusted gross income exceeds $200,000.
(3) Examples. The rules of this paragraph (h) are illustrated by
the following examples:
(i) Example 1: Dollar limitation--(A) Facts. A and B are married
and file a joint Federal income tax return. A incurs an SPVL to
purchase Vehicle 1. B incurs an SPVL to purchase Vehicle 2. During the
taxable year, A paid $6,000 of interest on the SPVL for Vehicle 1. B
paid $5,000 of interest on the SPVL for Vehicle 2.
(B) Analysis. A and B can deduct no more than $10,000 as QPVLI on
their joint Federal income tax return because of the dollar limitation
described in paragraph (h)(1) of this section.
(ii) Example 2: Modified adjusted gross income phaseout--(A) Facts.
A is an individual that paid $7,000 of QPVLI on an SPVL during the
taxable year and files a Federal income tax return with a filing status
as single. A has modified adjusted gross income of $124,200 for the
taxable year.
(B) Analysis. The maximum amount of QPVLI that A can deduct for the
taxable year is $2,000. A's modified adjusted gross income is greater
than $100,000. Therefore, the amount of QPVLI that can be taken into
account as QPVLI after the application of the dollar limitation
($7,000) must be reduced by $200 for each $1,000 (or portion thereof)
that A's modified adjusted gross income exceeds $100,000. A's modified
adjusted gross income exceeds $100,000 by $24,200. Thus, the $7,000
amount must be reduced by $5,000, which is equal to $200 x 25 ($24,200/
$1,000 = 24.2 (which is then rounded up to 25)).
(i) Applicability date. This section applies to taxable years
beginning after December 31, 2024, and before January 1, 2029.
0
Par. 3. Section 1.6050AA-1 is added to read as follows:
Sec. 1.6050AA-1 Information reporting of applicable passenger vehicle
loan interest received in a trade or business from an individual.
(a) Information reporting requirement--(1) Overview. The
information reporting requirements of section 6050AA of the Internal
Revenue Code (Code) and this section apply to an interest recipient who
receives at least $600 of interest on a specified passenger vehicle
loan (SPVL) from a payor of record for a calendar year. See paragraph
(b) of this section for definitions of terms used in section 6050AA and
this section.
(2) Reporting requirement. Except as otherwise provided in this
section, an interest recipient that receives at least $600 of interest
on an SPVL for a calendar year must--
(i) File an information return, as described in paragraph (f) of
this section, with the Internal Revenue Service (IRS); and
(ii) Furnish a statement to the payor of record, as described in
paragraph (g) of this section, on the SPVL.
(3) Optional reporting. An interest recipient may, but is not
required to, report its receipt of less than $600 of interest on an
SPVL for a calendar year. An interest recipient that chooses to file a
return as provided in this section and to furnish a statement as
provided in this section is subject to the requirements of this
section.
(b) Definitions. The following definitions apply for purposes of
section 6050AA and this section:
(1) Applicable passenger vehicle (APV). The term applicable
passenger
[[Page 91]]
vehicle or APV has the meaning provided in Sec. 1.163-16(b)(1).
(2) Calendar year for which interest is received--(i) In general.
Except as provided in paragraph (b)(2)(ii) of this section, the
calendar year for which interest is received is the later of the
calendar year in which the interest is received or the calendar year in
which the interest properly accrues.
(ii) De minimis rule. An interest recipient may treat interest
received during the current calendar year that properly accrues by
January 15 of the subsequent calendar year as interest received for the
current calendar year. For example, if an interest recipient receives a
monthly interest payment on December 31, Year 1, that includes interest
accruing for the period December 5, Year 1, to January 5, Year 2, the
interest recipient may treat the entire interest payment as received in
Year 1. If a portion of the interest for which a payment received in a
calendar year accrues after January 15 of the subsequent calendar year,
an interest recipient must report as interest received for the current
calendar year only the portion that properly accrues by the end of the
current calendar year. For example, if an interest recipient receives a
monthly payment that includes interest accruing for the period December
20, Year 1, through January 20, Year 2, the interest recipient may not
report as interest received for Year 1 any interest accruing after
December 31, Year 1. The interest recipient must report the interest
accruing after December 31, Year 1, as received for calendar Year 2.
(3) Interest recipient--(i) Trade or business requirement. An
interest recipient is a person that is engaged in a trade or business
(whether or not the trade or business of lending money) and that, in
the course of that trade or business, receives interest on an SPVL. For
purposes of this paragraph (b)(3)(i), if a person holds an SPVL that
was originated or acquired in the course of a trade or business, the
interest on the SPVL is considered to be received in the course of that
trade or business. The rules of this paragraph (b)(3)(i) are
illustrated by the following examples:
(A) Example 1: Financing entity--(1) Facts. Car manufacturer
finance subsidiary A lends money to individual B to enable B to
purchase an applicable passenger vehicle. B makes a payment to A of
interest on the SPVL.
(2) Analysis. Under the rules of this paragraph (b)(3), A is an
interest recipient for purposes of section 6050AA and must file an
information return reporting the interest received from B.
(B) Example 2: Interest not in the course of the trade or
business--(1) Facts. C, a person engaged in the trade or business of
being a physician, lends money to individual D to enable D to purchase
an APV from car dealer A. D makes a payment to C of interest on the
SPVL.
(2) Analysis. C is not an interest recipient for purposes of
section 6050AA and this paragraph (b)(3) because C will not receive the
interest in the course of the trade or business of being a physician. C
does not need to file an information return reporting the interest
received from D.
(C) Example 3: Dealer direct lending--(1) Facts. E, a corporation,
operates a car dealership under the ``buy here, pay here'' model. E
sells vehicles to retail customers and, as part of its ordinary course
of business, extends financing directly to the purchasers. Customer F
buys a vehicle from E and enters into a loan agreement with E for the
amount necessary to buy the vehicle. F pays E $1,200 of stated interest
on the indebtedness during the calendar year.
(2) Analysis. Because E is engaged in the trade or business of
selling automobiles and receives interest in the course of that trade
or business, E is an interest recipient for purposes of section 6050AA
and must file an information return reporting the interest received
from F.
(ii) Interest received on behalf of another person--(A) In general.
A person that, in the course of its trade or business, receives or
collects interest on an SPVL on behalf of another person (for example,
the lender of record) is the interest recipient (initial recipient) for
purposes of this paragraph (b)(3) with respect to the SPVL. In this
case, the reporting requirement of paragraph (a) of this section does
not apply to the transfer of interest from the initial recipient to the
person for which the initial recipient receives or collects the
interest. For example, if financial institution A collects interest on
behalf of financial institution B, A is the initial recipient of
interest for the SPVL and is subject to the reporting requirements of
section 6050AA. B is not required to report the interest received on
the SPVL from A.
(B) Exception. Paragraph (b)(3)(ii)(A) of this section does not
apply for any period for which--
(1) An initial recipient does not possess the information needed to
comply with the reporting requirement of paragraph (a) of this section;
and
(2) The person for which the interest is received or collected
would receive the interest in the course of its trade or business if
the interest were paid directly to that person.
(C) Application of exception. If the exception provided by
paragraph (b)(3)(ii)(B) of this section applies, the person for which
the interest is received or collected is the interest recipient with
respect to interest received or collected on the SPVL.
(D) Presumption. For purposes of this paragraph (b)(3)(ii), if
interest is received or collected on behalf of a person other than an
individual, that person is presumed to receive interest in the course
of its trade or business.
(4) Lender of record. The lender of record is the person who, at
the time the loan is originated, is named as the lender on the loan
documents and whose right to receive payment from the payor of record
is secured by a lien on the payor of record's APV. An intention by the
lender of record to sell or otherwise transfer the loan to a third
party subsequent to the close of the transaction does not affect the
determination of who is the lender of record.
(5) Payor of record. The payor of record on an SPVL is the person
specified on the books and records of the interest recipient as the
principal borrower on the SPVL. If the books and records of the
interest recipient do not indicate which borrower is the principal
borrower, the interest recipient must designate a borrower as the
principal borrower. The term person for purposes of this paragraph
(b)(5) means any individual, decedent's estate, or trust that is not a
grantor trust within the meaning of Sec. 1.163-16(b)(9) (non-grantor
trust).
(6) Secretary. The term Secretary has the meaning provided in
section 7701(a)(11) of the Code.
(7) Specified passenger vehicle loan (SPVL). The term specified
passenger vehicle loan or SPVL has the same meaning given by Sec.
1.163-16(b)(15).
(c) Reporting by foreign person. An interest recipient that is not
a United States person, as defined in section 7701(a)(30), must report
interest received on an SPVL only if it receives the interest--
(1) At a location in the United States; or
(2) At a location outside the United States and--
(i) The interest recipient is a controlled foreign corporation,
within the meaning of section 957(a) of the Code; or
(ii) 50 percent or more of the gross income of the interest
recipient from all sources for the three-year period ending with the
close of the taxable year preceding the receipt of interest (or for
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that part of the period for which the person was in existence) was
effectively connected with the conduct of a trade or business in the
United States.
(d) Reporting with respect to nonresident alien individual, foreign
decedent's estate, or foreign non-grantor trust--(1) In general. The
reporting requirement of paragraph (a) of this section does not apply
if the payor of record is a nonresident alien individual, a decedent's
estate that is a foreign estate within the meaning of section
7701(a)(31)(A), or a non-grantor trust that is a foreign trust within
the meaning of section 7701(a)(31)(B).
(2) Nonresident alien individual, foreign decedent's estate, and
foreign non-grantor trust. For purposes of paragraph (d)(1) of this
section, an interest recipient must apply the following documentation
rules to determine whether a payor of record is a nonresident alien
individual, foreign decedent's estate, or foreign non-grantor trust--
(i) If interest is paid outside the United States, the interest
recipient must satisfy the documentary evidence standard provided in
Sec. 1.6049-5(c) with respect to the payor of record; and
(ii) If interest is paid within the United States, the interest
recipient must secure from the payor of record an applicable Form W-8
(or a substitute form) that meets the validity and reliance
requirements described in Sec. 1.1441-1(e)(4).
(3) Place of payment. For purposes of paragraph (d)(2) of this
section, the place of payment is the place where the payor of record
completes the acts necessary to effect payment. An amount paid by
transfer to an account maintained by an interest recipient in the
United States or by mail to a United States address is considered to be
paid within the United States.
(e) Amount of interest received on SPVL for calendar year. Whether
an interest recipient receives $600 or more of interest on an SPVL for
a calendar year is determined on an SPVL-by-SPVL basis. An interest
recipient need not aggregate the interest received on all of the SPVLs
of a payor of record held by the interest recipient to determine
whether the $600 threshold is met. Therefore, an interest recipient
need not report interest of less than $600 received on an SPVL, even
though it receives a total of $600 or more of interest on all of the
SPVLs of the payor of record for a calendar year.
(f) Requirement to file return--(1) Form of return. An interest
recipient must file a return required by paragraph (a) of this section
on the form specified by the Secretary for this purpose, with Form
1096, Annual Summary and Transmittal of U.S. Information Returns. An
interest recipient may use forms containing provisions substantially
similar to those in the forms specified by the Secretary for this
purpose if it complies with applicable revenue procedures relating to
those forms. An interest recipient must file a separate return for each
SPVL for which it receives $600 or more of interest for a calendar
year.
(2) Information included on return. An interest recipient must
include on the form specified by the Secretary for this purpose--
(i) The name, address, and taxpayer identification number of the
payor of record;
(ii) The name, address, and taxpayer identification number of the
interest recipient;
(iii) The amount of interest received for the calendar year;
(iv) The amount of outstanding principal on the SPVL as of the
beginning of the calendar year;
(v) The date of the origination of the SPVL;
(vi) The year, make, model, and vehicle identification number of
the APV that secures the SPVL;
(vii) The date the SPVL was acquired; and
(viii) Any other information required by the form specified by the
Secretary for this purpose or its instructions.
(3) Time and place for filing return; cross-references to penalty
and electronic filing requirements. An interest recipient must file a
return required by paragraph (a) of this section on or before February
28 (March 31 if filed electronically) of the year following the
calendar year for which it receives the interest. An interest recipient
must file the return required by paragraph (a) of this section with the
IRS office designated in the instructions for the form. For provisions
relating to the penalty provided for the failure to file a correct
information return required by paragraph (a) of this section, see Sec.
301.6721-1 of this chapter. See Sec. 301.6724-1 of this chapter for
the waiver of a penalty if the failure is due to reasonable cause and
not due to willful neglect. See Sec. 301.6011-2(b) of this chapter for
requirement to submit the information returns required by this section
electronically.
(g) Requirement to furnish statement--(1) In general. An interest
recipient that must file a return under paragraph (a) of this section
must furnish a statement to the payor of record.
(2) Information included on statement. An interest recipient must
include on the statement that it must furnish to the payor of record--
(i) The information required under paragraph (f)(2) of this
section;
(ii) A legend that--
(A) Identifies the statement as important tax information that is
being furnished to the IRS; and
(B) Notifies the payor of record that if the payor of record is
required to file a return, a negligence penalty or other sanction may
be imposed if the IRS determines that an underpayment of tax results
because the payor of record overstated a deduction for this interest
(if any) on the payor of record's return; and
(iii) A legend stating that the payor of record may be unable to
deduct the full amount of SPVL interest reported on the statement; that
limitations based on the payor of record's modified adjusted gross
income may apply; and that the payor of record may deduct QPVLI only to
the extent the SPVL was incurred by, and the QPVLI actually paid by,
the payor of record.
(3) Copy of form determined by the Secretary to payor of record. An
interest recipient will satisfy the requirement of paragraph (g)(2)(i)
of this section by furnishing to a payor of record a copy of the form
determined by the Secretary (or substitute statement that complies with
applicable revenue procedures) containing all the information filed
with the IRS and all the legends required by paragraph (f)(2) of this
section.
(4) Furnishing statement with other information returns. An
interest recipient may transmit the statement required by paragraph
(g)(1) of this section to the payor of record with other information,
including other information returns, as permitted by applicable revenue
procedures.
(5) Time and place for furnishing statement. An interest recipient
must furnish a statement required by paragraph (g)(1) of this section
to the payor of record on or before January 31 of the year following
the calendar year for which it receives the interest. The interest
recipient will be considered to have furnished the statement to the
payor of record if it mails the statement to the payor of record's last
known address.
(h) Applicability date. This section applies to calendar years
beginning after December 31, 2024, and before January 1, 2029.
PART 301--PROCEDURE AND ADMINISTRATION
0
Par. 4. The authority citation for part 301 continues to read in part
as follows:
[[Page 93]]
Authority: 26 U.S.C. 7805
* * * * *
0
Par. 5. Section 301.6011-2 is amended by revising paragraph (b)(1) to
read as follows:
Sec. 301.6011-2 Required use of electronic form.
* * * * *
(b) * * *
(1) If the use of Form 1042-S, Form 1094 series, Form 1095-B, Form
1095-C, Form 1097-BTC, Form 1098, Form 1098-C, Form 1098-E, Form 1098-
Q, Form 1098-T, a Form to report information required under section
6050AA, Form 1099 series, Form 3921, Form 3922, Form 5498 series, Form
8027, or Form W-2G is required by the applicable regulations or revenue
procedures for the purpose of making an information return, the
information required by the form must be submitted electronically,
except as otherwise provided in paragraph (c) of this section. Returns
filed electronically must be made in accordance with applicable revenue
procedures, publications, forms, or instructions.
* * * * *
0
Par. 6. Section 301.6721-1 is amended by:
0
1. Revising paragraphs (h)(3)(xxvi) and (xxvii);
0
2. Adding paragraph (h)(3)(xxviii); and
0
3. Revising paragraph (j)(2).
The additions and revision read as follows:
Sec. 301.6721-1 Failure to file correct information returns.
* * * * *
(h) * * *
(3) * * *
(xxvi) Section 6050Y (relating to returns relating to certain life
insurance contract transactions);
(xxvii) Section 6050Z (relating to reports relating to long-term
care premium statements); or
(xxviii) Section 6050AA (relating to returns relating to QPVLI
received in trade or business from individuals).
* * * * *
(j) * * *
(2) Exceptions.
(i) Paragraph (h)(2)(xii) of this section applies with respect to
information returns required to be filed after September 17, 2024.
(ii) Paragraph (h)(2)(xxviii) of this section applies with respect
to information returns required to be filed for taxable years beginning
after December 31, 2024, and before January 1, 2029.
0
Par. 7. Section 301.6722-1 is amended by:
0
1. Revising paragraphs (e)(2)(xxxvii) and (xxxviii);
0
2. Adding paragraph (e)(2)(xxxix); and
0
3. Revising paragraph (g)(2).
The additions and revision read as follows:
Sec. 301.6722-1 Failure to furnish correct payee statements.
* * * * *
(e) * * *
(2) * * *
(xxxvii) Section 6226(a)(2) (regarding statements relating to
alternative to payment of imputed underpayment by a partnership) or
under any other provision of this title 26 that provides for the
application of rules similar to section 6226(a)(2);
(xxxviii) Section 6050Z (relating to reports relating to long-term
care premium statements); or
(xxxix) Section 6050AA (relating to returns relating to QPVLI
received in trade or business from individuals).
* * * * *
(g) * * *
(2) Exceptions.
(i) Paragraph (e)(2)(xxxv) of this section applies with respect to
payee statements required to be furnished after September 17, 2024.
(ii) Paragraph (e)(2)(xxxix) of this section applies with respect
to payee statements required to be furnished for taxable years
beginning after December 31, 2024, and before January 1, 2029.
Frank J. Bisignano,
Chief Executive Officer.
[FR Doc. 2025-24154 Filed 12-31-25; 8:45 am]
BILLING CODE 4831-GV-P
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Document
Car Loan Interest Deduction
This document contains proposed regulations regarding the deduction for certain taxpayers for an amount up to $10,000 of qualified passenger vehicle loan interest. This document...
Legal Citation
Federal Register Citation
Use this for formal legal and research references to the published document.
91 FR 67
Web Citation
Suggested Web Citation
Use this when citing the archival web version of the document.
“Car Loan Interest Deduction,” thefederalregister.org (January 2, 2026), https://thefederalregister.org/documents/2025-24154/car-loan-interest-deduction.