COMMENT CALL: The IRS has proposed regulations on the temporary new deduction for interest paid on loans to buy new made-in-America vehicles for personal use after Dec. 31, 2024.
Background
As explained in this Compliance Courier, the so-called “One Big Beautiful Bill” introduced the deduction. The law created a new reporting requirement for businesses, including credit unions, that receive $600 or more in interest on loans originated after Dec. 31, 2024, for the purchase of certain passenger vehicles for consumer use. A qualified passenger vehicle is a car, minivan, van, SUV, pick-up truck, or motorcycle, with a gross vehicle weight rating of less than 14,000 pounds that has undergone final assembly in the U.S.
The law was short on details, however, leaving credit unions and taxpayers with questions about how the deduction would be implemented. The IRS addressed some of these issues by issuing transitional guidance for lenders last fall. That guidance addressed how credit unions and other lenders can report auto loan interest for now.
The IRS is now proposing formal regulations to help both consumers and lenders understand the scope of the law, reporting obligations, and other issues going forward.
Proposed rules can already be relied upon
Though it will take some time for the regulations to be finalized, the IRS wrote that “interest recipients [meaning auto lenders who receive interest on covered car loans] may rely on the proposed regulations … with respect to indebtedness incurred for the purchase of an “applicable passenger vehicle” (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.”
Be aware, however, that when the rules are finalized, they may differ in some ways from what is now being proposed.
The proposed regulations – overview
In general, credit unions and other lenders must file information returns with the IRS to report interest received during the tax year and other information related to qualifying vehicle loans. These information returns enable taxpayers to claim the benefits of the vehicle loan interest deduction.
To help lenders implement these information reporting requirements, the proposed regulations:
- Clarify which lenders and other interest recipients are required to report and the time and manner for this reporting;
- Address the information that must be included on the form provided to the IRS and to taxpayers.
- Provide rules for assignees in indirect lending on how to determine and report required information;
- Clarify refinance treatment by capping deductible interest to the outstanding principal at refinance;
- Specify reporting timing/mechanics (interest for the year and principal-balance snapshots); and
- Set allocation rules separating qualifying vehicle-related amounts from non-qualifying amounts (including negative equity).
To help taxpayers take advantage of the deduction, the proposal addresses important eligibility criteria, including:
- Rules relating to new vehicles eligible for the deduction, including for determining if the final assembly of a vehicle occurred in the U.S.;
- Rules for determining which vehicle loans qualify and the amount of interest paid on a loan that may be deductible;
- Rules for determining whether a new vehicle is purchased for personal use; and
- Rules to identify the taxpayers who can take the deduction and to clarify the $10,000 annual deduction limit.
The proposed regulations – specifics
The proposal is detailed and quite technical. It explains what counts as “qualified passenger vehicle loan interest (QPVLI),” and it spells out the information reporting requirements for credit unions and others that receive interest on a “specified passenger vehicle loan (SPVL).”
The following material summarizes some of the important provisions, but it does not address everything. For details, please refer to the proposal itself. Portions of this material are from a technical analysis published by Current Federal Tax Developments.
Definition of qualified passenger vehicle loan interest
Under the proposal, interest would qualify as QPVLI only if it is “paid or accrued during the taxable year on indebtedness that is an SPVL secured by a first lien on an [applicable passenger vehicle] and is not excluded from the definition of QPVLI.”
The regulations would define “secured by a first lien” as a “valid and enforceable security interest under State or other applicable law in an APV with status ahead of all other security interests.” There are exceptions for tax liens or similar interests that may gain priority by operation of law. The proposed regulations include two examples to distinguish eligible purchases from leases and to address collateral substitution.
Specified passenger vehicle loan & allowable principal
The proposal would define SPVL as “indebtedness incurred by the taxpayer… for the purchase of, and that is secured by a first lien on, an APV for personal use.”
Under the proposal, indebtedness would qualify only if it 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.” Examples of qualifying financed amounts include “vehicle service plans, extended warranties, sales taxes, and vehicle-related fees.”
Conversely, the regulations would exclude “negative equity” from previous vehicle loans, as well as amounts borrowed “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).”
If a loan covers both qualifying and non-qualifying amounts (e.g., a car purchase and negative equity), the debt must be bifurcated – divided into two parts. The proposal says, “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.” The proposal includes examples illustrating these calculations.
Personal use requirement
The new deduction is only available if the vehicle was purchased for “personal use.” The proposed regulations would adopt an “expectation” test rather than an actual use test, meaning that a taxpayer would satisfy the requirement “if, at the time the indebtedness is incurred, the taxpayer expects that the APV will be used for personal use… for more than 50 percent of the time.”
This determination is made once. The IRS explains: “The personal use requirement … must be satisfied in connection with the incurrence of indebtedness, as opposed to an ongoing requirement. … Differences between expected use and later actual use do not affect the taxpayer’s eligibility to deduct QPVLI.” Furthermore, the definition of personal use is broad, including use by the taxpayer, their spouse, or a related individual.
The proposal includes examples to illustrate the 50 percent threshold.
Applicable passenger vehicle and domestic assembly
The new deduction is only for APVs that meet certain criteria, including 1) that “the original use of which commences with the taxpayer” and 2) that “final assembly… occur[red] within the United States.”
Regarding original use, the proposed rules say that “original use commences with the first person that takes delivery of a vehicle after the vehicle is sold, registered, or titled.” For dealer demonstrator vehicles, original use generally does not commence with the dealer unless the dealer “registers or titles the vehicle to itself.” The proposal gives five examples to clarify this requirement, particularly regarding dealer usage and cancelled sales.
For the domestic assembly requirement, taxpayers may rely on “the vehicle’s plant of manufacture as reported in the VIN… or the final assembly point reported on the label affixed to the vehicle.”
Eligible taxpayers
Under the proposal, “only individuals, decedents’ estates, and non-grantor trusts may deduct QPVLI.” Business entities could not take the deduction. For grantor trusts – such as the common revocable living trusts – eligibility would be determined by looking through to the owner. The regulations would say that “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.”
Reporting requirements
The proposal would require a new information return form to be filed with the IRS by 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.” This would include credit unions and other lenders.
The “interest recipient” is generally the person receiving the interest, but look-through rules would apply when interest is collected on behalf of another. Generally, “the person that first receives the interest generally would be required to report… and no reporting would be required upon the transfer of the interest… to the person on whose behalf the interest recipient received the interest,” the IRS wrote.
The “payor of record” would be defined as “any person carried on the books and records of the interest recipient as the principal borrower on the SPVL.” If records do not specify a principal borrower, the recipient must designate one.
Interest recipients would have to file the required information return with the IRS “on or before February 28 (March 31 if filed electronically) of the year following the calendar year in which it receives the interest.” The proposal includes examples defining who constitutes an “interest recipient” required to file Form 1098-VLI.
In addition, because SPVLs may be sold or otherwise transferred to a new lender of record, the proposed regulations would require the lender of record to include the date it acquired the loan on the form.
Statements to taxpayers
Interest recipients would have to furnish statements to taxpayers, which would have to include a statement warning that “the payor of record may be unable to deduct the full amount of interest reported on the statement” due to statutory limitations. The statement must be furnished to the payor of record “on or before January 31 of the year following the calendar year.”
Under the proposal, 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 IRS wrote, adding:
The Treasury Department and the IRS are aware that it might be burdensome for interest recipients to determine which SPVLs require reporting … 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, [the proposal regulations] 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 … of less than $600 would be subject to the requirements” related to the contents of the statement.
Determining if an indirect loan is an SPVL
The IRS addressed indirect lending in its introductory material to the proposed regulations, saying:
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 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.
Refinanced vehicle purchase loans
Under the proposal, a new loan resulting from refinancing an SPVL would still be an SPVL if the new loan is secured by a first lien on the APV, but the amount of the new loan that is an SPVL would be limited to the outstanding balance of the refinanced SPVL as of the date of the refinancing.
If there is a change in obligor [i.e., a different borrower] 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. The proposal includes examples to illustrate the application of these rules.
Make your voice heard
The League plans to submit a comment letter on this proposal, but we’d like to reflect the views of Wisconsin’s credit unions. Do you favor this proposal? Are there additional issues the IRS should consider? Do you have any suggested edits or changes to the proposed new rules? Please share your feedback with Paul Guttormsson at The League by Jan. 26, so that our comment letter (which is due Feb. 2) can reflect your opinions.