Car Loan Interest Deduction

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Published
September 8, 2026
Effective
November 9, 2026
Issuing agencies

Treasury DepartmentInternal Revenue Service
Abstract

This document contains final regulations regarding the deduction for certain taxpayers for an amount up to $10,000 of qualified passenger vehicle loan interest. This document also contains final 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. These regulations affect taxpayers that may deduct qualified passenger vehicle loan interest, and also persons subject to these information reporting requirements.
Full Text

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<title>Federal Register, Volume 91 Issue 172 (Tuesday, September 8, 2026)</title>
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[Federal Register Volume 91, Number 172 (Tuesday, September 8, 2026)]
[Rules and Regulations]
[Pages 57214-57244]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-18219]



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Vol. 91

Tuesday,

No. 172

September 8, 2026

Part II





 Department of the Treasury





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 Internal Revenue Service





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26 CFR Parts 1 and 301





Car Loan Interest Deduction; Final Rule

Federal Register / Vol. 91 , No. 172 / Tuesday, September 8, 2026 / 
Rules and Regulations

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 10054]
RIN 1545-BR75


Car Loan Interest Deduction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations regarding the 
deduction for certain taxpayers for an amount up to $10,000 of 
qualified passenger vehicle loan interest. This document also contains 
final 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. These regulations affect taxpayers that may deduct qualified 
passenger vehicle loan interest, and also persons subject to these 
information reporting requirements.

DATES: 
    Effective date: The final regulations are effective on November 9, 
2026.
    Applicability date: For dates of applicability, see Sec. Sec.  
1.163-16(i) and 1.6050AA-1(i).

FOR FURTHER INFORMATION CONTACT: Riston Escher of the Office of 
Associate Chief Counsel (Income Tax & Accounting) at (202) 317-7003 
(not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Authority

    This document contains amendments that 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 document also contains 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 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 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 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. 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. Section 70203(c) of the OBBBA added new section 
6050AA to the Code to require information 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. Section 6050AA(f) provides that no information 
return is required under section 6050AA for any period to which section 
163(h)(4) does not apply.

I. Section 163

    Section 163(a) allows a deduction for all interest paid or accrued 
within the 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 (chapter 1). 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 such 
taxable years. Section 163(h)(4)(B)(i) provides that ``qualified 
passenger vehicle loan interest'' 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 ``applicable passenger vehicle'' 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 refinancings 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

[[Page 57215]]

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

    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 
interest recipient, and the information required to be included in the 
information return under section 6050AA(b)(2)(B) through (F).
    Section 6050AA(d)(1) provides that terms used in section 6050AA 
that are also used in section 163(h)(4) have the same meaning as when 
used in section 163(h)(4). Section 6050AA(d)(2) defines ``specified 
passenger vehicle loan'' as the indebtedness described in section 
163(h)(4)(B) with respect to any APV.
    Section 6050AA(e) authorizes the Secretary to issue regulations or 
guidance as may be necessary or appropriate 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) of 
the Code 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 calendar year 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.

VI. Notice of Proposed Rulemaking

    On January 2, 2026, the Treasury Department and the IRS published a 
notice of proposed rulemaking and notice of public hearing (REG-113515-
25) in the Federal Register (91 FR 67) under sections 163, 6050AA, 
6011, 6721, and 6722 (proposed regulations). The proposed regulations 
proposed rules regarding the deduction for certain taxpayers for an 
amount up to $10,000 of QPVLI. The proposed regulation also proposed 
rules regarding the 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 an SPVL, 
including applicable penalties for failures to file information returns 
or furnish payee statements as required. The proposed regulations also 
proposed rules relating to electronic filing of returns under section 
6011.

Summary of Comments and Explanation of Revisions

I. Overview

    The Treasury Department and the IRS received 63 public comments in 
response to the notice of proposed rulemaking. Copies of the comments 
are available for public inspection at <a href="http://www.regulations.gov">http://www.regulations.gov</a> or 
upon request. In addition, a public hearing on the proposed regulations 
was held on February 24, 2026, at which three speakers provided 
testimony. After considering all of the public comments, speaker 
outlines, and testimony (collectively, comments) received in response 
to the proposed regulations, the Treasury Department and the IRS adopt 
the proposed regulations, as revised in response to the comments 
described in this Summary of Comments and Explanation of Revisions, as 
final regulations.
    Comments addressing issues that are outside the scope of this 
rulemaking are generally not addressed in this Summary of Comments and 
Explanation of Revisions or adopted in the final regulations. These 
comments included recommendations and questions regarding 
implementation issues for other Code provisions and examination 
selection criteria. Unless otherwise indicated in this Summary of 
Comments and Explanation of Revisions, provisions of the proposed 
regulations with respect to which no comments were received are adopted 
without substantive change.

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II. Comments on Proposed Sec.  1.163-16

A. In General
    In response to the comments received, the final regulations include 
revisions to the following provisions in proposed Sec.  1.163-16: 
proposed Sec.  1.163-16(b)(12) (Qualified passenger vehicle loan 
interest (QPVLI)) (finalized as Sec.  1.163-16(b)(13)); proposed Sec.  
1.163-16(b)(13) (Qualified vehicle classification) (finalized as Sec.  
1.163-16(b)(14) (Qualified vehicle type)); proposed Sec.  1.163-
16(b)(14) (Secured by a first lien) (finalized as Sec.  1.163-
16(b)(15)); proposed Sec.  1.163-16(c)(2) (Determining the amount of 
interest paid or accrued during a taxable year); proposed Sec.  1.163-
16(d)(2) (Indebtedness incurred for the purchase of an APV); and 
proposed Sec.  1.163-16(e)(2) (Determining whether original use 
commences with the taxpayer). Additionally, in response to the comments 
received, the final regulations include the addition of the following 
new provisions in Sec.  1.163-16: Sec.  1.163-16(b)(6) (Items or 
amounts customarily financed in an APV purchase transaction that are 
directly related to the purchase of the APV); Sec.  1.163-16(d)(6)(v) 
(Example 5: Method of allocating interest); Sec.  1.163-16(e)(2)(ii) 
(Dealers); Sec.  1.163-16(e)(2)(iii) (Original use for joint 
purchasers).
    The final regulations also include revisions to Sec.  1.163-
16(c)(3)(ii) (Exception for substitute vehicle due to an unforeseen 
intervening event). The revisions to Sec.  1.163-16(c)(3)(ii) are 
intended to clarify that a substitute APV described in Sec.  1.163-
16(c)(3)(ii) is treated as the APV with respect to which the SPVL was 
incurred for the purposes of Sec.  1.163-16(c)(5) (VIN requirement) and 
Sec.  1.163-16(d)(4) (Refinancing of an SPVL).
B. Definitions
1. Secured By a First Lien
    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. Proposed Sec.  1.163-16(b)(14) 
provided that, for purposes of section 163(h)(4) and the proposed 
regulations, ``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.
    One commenter requested that the final regulations provide clarity 
on whether ``first lien'' status is determined by the initial filing 
and attachment of the security interest, regardless of involuntary 
liens such as mechanic's liens or State tax liens that may cause the 
earlier lien to be subordinated. The commenter recommended that the 
final regulations clarify that a loan qualifies as a first lien so long 
as it was the first voluntary security interest recorded against the 
vehicle, disregarding involuntary liens (for example, mechanic's liens 
or State tax liens) that may take temporary legal priority under State 
or local law.
    The Treasury Department and the IRS agree with the commenter that 
it would be helpful to further clarify the status of a lien that is 
subordinated by involuntary liens. Accordingly, Sec.  1.163-16(b)(15) 
provides that ``secured by a first lien'' means the first voluntary 
security interest recorded against the vehicle, disregarding any 
involuntary liens that may be given temporary higher priority at a 
later date.
    One commenter noted that under State law, vehicle lien placement 
generally relates back to the loan origination date if the lien is 
perfected within a statutory grace period. In certain cases, however, 
lien perfection may occur after this grace period, often due to 
administrative delays in title processing that are outside the lender's 
control. Accordingly, the commenter recommended that the final 
regulations clarify that interest accruing from the loan origination 
date (rather than the lien perfection date) may be QPVLI so long as the 
contract was originated as a purchase transaction secured by a first 
lien.
    This commenter also noted that there are circumstances in which a 
vehicle lien is removed before the loan is paid in full, such as in the 
case of repossession and subsequent sale of the vehicle, or an 
insurance payment following a total loss claim. Accordingly, the 
commenter recommended that the final regulations clarify that temporary 
or permanent lien release events that occur after loan origination do 
not retroactively or prospectively disqualify a taxpayer from claiming 
the QPVLI deduction, provided that the vehicle finance contract was 
originally secured by a first lien on the purchased APV.
    The Treasury Department and the IRS generally agree with these 
comments. Accordingly, Sec.  1.163-16(b)(15) provides that an APV may 
be considered to be secured by a first lien even in a case in which a 
lien has not yet been perfected or recorded due to processing times or 
other similar short-term delays arising under State or other applicable 
law, and in limited circumstances in which a lien is removed in 
connection with the taxpayer no longer owning the vehicle but the 
taxpayer continues to be liable for an SPVL, such as in the case of a 
repossession of the vehicle or an insurance payout following a total 
loss claim.
2. Qualified Vehicle Type
    Section 163(h)(4)(D)(iv) provides that a vehicle is an APV only if 
it is a car, minivan, van, sport utility vehicle, pickup truck, or 
motorcycle. Proposed Sec.  1.163-16(b)(13)(ii) through (vii) defined 
the terms ``car,'' ``minivan,'' ``van,'' ``sport utility vehicle,'' 
``pickup truck,'' and ``motorcycle'' by reference to certain vehicle 
classifications and definitions used by the Environmental Protection 
Agency (EPA). Some of these classifications depend on a vehicle's gross 
vehicle weight rating (GVWR) and one of these definitions depend on a 
vehicle's curb mass. Further, section 163(h)(4)(D)(vi) requires, and 
proposed Sec.  1.163-16(e)(1)(vi) provided that for a vehicle to be an 
APV it must have a GVWR of less than 14,000 pounds.
    One commenter noted that the proposed Sec.  1.163-16(b)(13)(v) 
definition of sport utility vehicle would exclude sport utility 
vehicles with a GVWR exceeding 10,000 pounds. The commenter also noted 
that the proposed Sec.  1.163-16(b)(13)(vi) definition of pickup truck 
would exclude pickup trucks with a GVWR exceeding 8,500 pounds. The 
commenter requested clarification on how the definitions in proposed 
Sec.  1.163-16(b)(13)(v) and (vi) would operate together with the 
14,000-pound GVWR limitation provided by section 163(h)(4)(D)(vi) and 
proposed Sec.  1.163-16(e)(1)(vi).
    The Treasury Department and the IRS agree with the commenter that 
the definitions of sport utility vehicle and pickup truck provided in 
proposed Sec.  1.163-16(b)(13) could cause confusion regarding the 
treatment of those vehicles that have a GVWR that exceeds the GVWR 
specified in the applicable definition referenced in proposed Sec.  
1.163-16(b)(13), but do not exceed the 14,000-pound GVWR limitation 
provided by section 163(h)(4)(D)(vi). Further, while the definition of 
motorcycle referenced in proposed Sec.  1.163-16(b)(13) would exclude 
motorcycles with a curb mass greater than 1,499 pounds, this weight 
restriction is not a statutory requirement. Accordingly, Sec.  1.163-
16(b)(14) provides broader definitions of sport utility vehicle, pickup 
truck, and motorcycle that do not reference a

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GVWR or curb weight limitation for vehicles. Additionally, for clarity 
and ease of administration, the final regulations define van and 
minivan by direct reference to the applicable EPA regulation. As under 
the proposed regulations, these revised definitions operate together 
with, and do not alter, the separate requirement in section 
163(h)(4)(D)(v) that the vehicle be treated as a motor vehicle for 
purposes of title II of the Clean Air Act.
C. Qualified Passenger Vehicle Loan Interest (QPVLI)
    Section 163(h)(4)(B)(i) provides and proposed Sec.  1.163-16(d)(1) 
provided 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. Proposed Sec.  1.163-16(c) provided, in relevant part, 
that 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.
    For purposes of section 163(h)(4), QPVLI includes all interest 
payable with respect to the amount financed under an SPVL. In general, 
interest is an amount paid, received, or accrued as compensation for 
the use or forbearance of money under the terms of an instrument or 
contractual arrangement that is treated as a debt instrument for 
Federal income tax purposes or an amount otherwise treated as interest 
under the Code or Income Tax Regulations. For example, see Sec.  
1.163(j)-1(b)(22)(i); see also Deputy v. DuPont, 308 U.S. 488, 498 
(1940).
    Several commenters requested clarification on what constitutes 
interest for purposes of section 163(h)(4). Specifically, clarification 
was requested as to the treatment of stated periodic interest, prepaid 
interest (such as points), origination-related or financing-related 
charges, prepayment penalties, late payment charges, default-related 
charges, returned payment fees, and deferred or capitalized interest 
that is added to the outstanding principal balance in accordance with 
the terms of the indebtedness. Some commenters mentioned that certain 
of the fees are specifically referenced in other regulations or 
guidance relating to the deduction of interest for Federal income tax 
purposes (for example, see Sec. Sec.  1.221-1(f) and 1.6050H-1).
    The Treasury Department and the IRS agree with the commenters that 
additional clarification on what constitutes interest is appropriate, 
including the addition of examples of fees that are interest for 
purposes of section 163(h)(4). Accordingly, Sec.  1.163-16(c)(2)(i) 
clarifies that QPVLI includes prepaid interest in the form of points 
and deferred or capitalized interest. The final regulations also 
provide that QPVLI includes origination-related or financing-related 
charges, prepayment penalties, late payment charges, default-related 
charges, and similar fees, if such charge, penalty, or fee is 
characterized as interest expense for Federal income tax purposes and 
is included in the amount reported as interest in the statement 
furnished to the taxpayer under section 6050AA(c) and Sec.  1.6050AA-
1(h). However, to the extent such interest (including prepaid interest 
in the form of points or deferred or capitalized interest) creates or 
increases the amount of original issue discount on the SPVL, such 
amounts generally are not deductible until paid in accordance with the 
payment ordering rules described in Sec.  1.163-16(c)(2)(ii). See also 
section 1275(b) of the Code. The payment ordering rules in Sec. Sec.  
1.446-2 and 1.1275-2 determine when interest (including original issue 
discount) is paid and therefore deductible by the borrower. Similarly, 
these rules generally apply for information reporting purposes, 
including section 6050AA.
D. Specified Passenger Vehicle Loan (SPVL)
1. Indebtedness
    Section 163(h)(4)(B)(i) provides and proposed Sec.  1.163-16(d)(1) 
provided 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.\1\ Proposed Sec.  1.163-16(c) provided, in relevant part, 
that 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.
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    \1\ Section 163(h)(4)(B)(i) does not use a specific term for 
this indebtedness, and the final regulations, like the proposed 
regulations, refer to such indebtedness as a ``specified passenger 
vehicle loan'' or an ``SPVL,'' which is the term used in section 
6050AA to reference this indebtedness, for consistency.
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a. Incurring Indebtedness
    Multiple commenters recommended that taxpayers should also be able 
to deduct QPVLI for vehicle loans incurred prior to December 31, 2024. 
These commenters noted that section 163(h)(4)(B)(i) excludes taxpayers 
who took out a loan to purchase a new vehicle in late 2024 but will pay 
nearly all of the interest on the loan from 2025 through 2028, the 
years in which QPVLI may be deducted.
    Section 163(h)(4)(B)(i) defines ``qualified passenger vehicle loan 
interest'' or QPVLI, in relevant part, as interest paid on a loan 
incurred after December 31, 2024. Therefore, the Treasury Department 
and the IRS are not able to adopt the commenters' recommendation as 
doing so would be inconsistent with the plain language of the statute.
    One commenter asked how to identify the amount of interest if a 
vehicle is purchased with a credit card. Section 163(h)(4)(B)(i) 
requires, in relevant part, that indebtedness be secured by a first 
lien on an APV. The Treasury Department and the IRS note that generally 
credit card indebtedness is not secured indebtedness. Therefore, the 
purchase of an APV, in whole or in part, with a credit card would 
generally not result in an SPVL and therefore any interest paid or 
accrued on this credit card indebtedness would not be QPVLI.
b. Amount of the Indebtedness
i. Indebtedness Incurred To Purchase an APV
    Several commenters requested that the Treasury Department and the 
IRS treat all of the indebtedness incurred in connection with the 
purchase of an APV as an SPVL, and not require an allocation of the 
indebtedness between the SPVL portion and the non-SPVL portion as 
provided in proposed Sec.  1.163-16(d)(2)(iii)(A) because of the 
compliance burden this allocation approach would impose.
    The allocation approach, however, is necessary to ensure compliance 
with the statutory requirement that only interest ''for the purchase'' 
of an APV is deductible under section 163(h)(4). Accordingly, the final 
regulations maintain the allocation approach.
    Proposed Sec.  1.163-16(d)(2)(i) generally provided that 
indebtedness qualifies as 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 purchase of the APV. The preamble to the proposed regulations 
provided that whether items or amounts are customarily financed in an 
APV purchase transaction is 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)(i) provided examples of such 
``customarily financed'' items to include vehicle service plans, 
extended warranties, sales

[[Page 57218]]

taxes, and vehicle-related fees. Proposed Sec.  1.163-16(d)(2) provided 
that any indebtedness that is not described in proposed Sec.  1.163-
16(d)(2)(i) would not qualify as an SPVL, even if the items or amounts 
were incurred as part of a purchase transaction for an APV. Examples of 
such indebtedness include indebtedness incurred for the 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 not directly related to an APV (for example, a trailer or 
boat).
    Several commenters requested that the Treasury Department and the 
IRS expand the list of examples in proposed Sec.  1.163-16(d)(2)(i) of 
items that are customarily financed in an APV purchase transaction that 
are directly related to the purchase of the APV, including such items 
as vehicle repair plans, mechanical repair coverage, vehicle protection 
products (including tire, wheel, paint, and interior protection 
products), warranties, extended warranties, guaranteed asset protection 
(GAP) insurance, credit-related insurance products (including credit-
related accident, health, and life products), key fob replacement, and 
title and registration fees.
    The Treasury Department and the IRS agree with the commenters that 
expanding the examples of items customarily financed in an APV purchase 
transaction that are directly related to the purchase of the APV would 
provide additional clarity. Accordingly, the final regulations expand 
the list of examples of items customarily financed in an APV purchase 
transaction that are directly related to the purchase of the APV. 
Further, the final regulations clarify that the exclusion for collision 
and liability insurance applies only to collision or liability 
insurance that is not credit insurance.
    One commenter requested that the Treasury Department and the IRS 
expand the list of examples in proposed Sec.  1.163-16(d)(2)(i) to 
include vehicle-related accessories as items that are regarded as 
customarily obtained or paid for as part of an APV purchase 
transaction. The Treasury Department and the IRS agree that 
indebtedness attributable to vehicle-related accessories that are 
components of the APV may be included in an SPVL. Accordingly, the 
final regulations provide that indebtedness incurred for vehicle-
related accessories that are components of the APV purchased as part of 
an APV transaction may be an SPVL. Additionally, the final regulations 
now include language adopted from the preamble to the proposed 
regulations to make clear that whether items or amounts are customarily 
financed in an APV purchase transaction and are directly related to the 
purchase of the APV is determined on an industry-wide basis and not by 
reference to the financing terms of a particular financing entity.
ii. Negative Equity
    A number of comments received were related to 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, which is sometimes referred 
to as ``negative equity.'' Proposed Sec.  1.163-16(d)(2)(ii) provided 
that indebtedness incurred for amounts representing negative equity 
under an existing loan on a trade-in vehicle is not incurred by a 
taxpayer for the purchase of an APV, and therefore is not an SPVL.
    Many commenters requested that the Treasury Department and the IRS 
instead provide that indebtedness incurred for amounts representing 
negative equity may qualify as an SPVL, especially because the 
incurrence of indebtedness for amounts representing negative equity 
occurs regularly for many purchasers.
    The Treasury Department and the IRS do not adopt these requests, 
and the final regulations provide that indebtedness incurred for 
amounts representing negative equity is not incurred by a taxpayer for 
the purchase of an APV, and therefore is not an SPVL. Section 
163(h)(4)(B)(i) describes indebtedness that is incurred by the taxpayer 
for the purchase of an APV for personal use. Amounts representing 
negative equity are not incurred for the purchase of an APV as required 
by the statute and instead represent indebtedness related to a prior 
purchased vehicle that is refinanced in connection with the purchase of 
a new vehicle. While proposed Sec.  1.163-16(d)(2)(i) provided that an 
SPVL also includes indebtedness incurred for items or amounts 
customarily financed in an APV purchase transaction and that are 
directly related to the purchase of the APV, negative equity on an 
existing vehicle loan is not related to the purchase of the APV--the 
negative equity instead relates to a prior vehicle purchase transaction 
that is distinct from and unrelated to the APV purchase. Moreover, 
allowing amounts representing negative equity to be included in an SPVL 
would allow taxpayers to deduct interest attributable to indebtedness 
incurred prior to 2025 or for the purchase of a vehicle that is not an 
APV. Accordingly, the final regulations exclude amounts of indebtedness 
attributable to negative equity from being an SPVL.
c. Method of Allocating Interest
    Proposed Sec.  1.163-16(d)(2)(iii)(A) provided that in the case of 
indebtedness that is partially an SPVL, payments of interest and 
principal are allocated on a pro rata basis between the portion of 
indebtedness that is an SPVL and the portion of indebtedness that is 
not an SPVL.
    Two commenters requested guidance on acceptable allocation methods 
or, alternatively, requested confirmation as to whether reasonable 
allocation methods will be permitted. However, neither commenter 
suggested any examples of an allocation method different from the pro 
rata method contained in the proposed regulations. Another commenter 
proposed calculating the amount of deductible interest on a 
proportional basis. For example, if a consumer financed a vehicle with 
a balance of $50,000 and $5,000 of that balance was determined to not 
be an SPVL, deductible interest would be 90 percent (45,000/50,000) of 
the total interest paid with 10 percent (5,000/50,000) being non-
deductible.
    The final regulations require the use of the pro rata allocation 
method and do not provide for any other allocation method. The final 
regulations also add an example illustrating the pro rata allocation 
method. See Sec.  1.163-16(d)(6)(v).
2. Refinancing
    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. This proposed rule 
was described in proposed Sec.  1.163-16(d)(4), which clarified 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 section 163(h)(4)(B)(i) and (h)(4)(D)(i), 
proposed Sec.  1.163-16(d)(5)(i) provided that the SPVL must have been 
originally incurred by the taxpayer, and proposed Sec.  1.163-16(d)(4) 
provided 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).

[[Page 57219]]

    A number of commenters requested that the Treasury Department and 
the IRS clarify in the final regulations whether additional APV-related 
products or customary amounts incurred in a refinancing (for example, 
refinancing charges and vehicle-related consumer protection products, 
including warranties and insurance products) constitute indebtedness 
that is an SPVL. The commenters described a typical situation in which 
the customer refinances the loan to purchase an APV shortly after the 
customer purchased the APV (for example, to get a lower interest rate 
than the rate charged by the dealer). As part of the refinancing, the 
customer finances the purchase of what would otherwise be ``customarily 
financed'' items or amounts in an APV purchase transaction, such as GAP 
insurance, that the customer did not purchase in connection with the 
original APV purchase transaction.
    The Treasury Department and the IRS do not adopt these requests. 
Under section 163(h)(4)(E)(ii), if an SPVL is refinanced, the new loan 
cannot qualify as an SPVL to the extent the amount of the new loan 
exceeds the amount of the refinanced SPVL. The inclusion of amounts in 
excess of the amount of the refinanced loan, even if such amounts are 
attributable to products or amounts related to or customarily incurred 
with the purchase of an APV, would conflict with the plain language of 
the statute. Accordingly, the final regulations do not adopt these 
comments.
    Several commenters requested that the Treasury Department and the 
IRS clarify in the final regulations whether the inclusion of 
additional obligors in a refinancing of an SPVL would result in the new 
loan failing to qualify as an SPVL. Consistent with section 
163(h)(4)(B)(i) and (h)(4)(D)(i), and as provided in proposed Sec.  
1.163-16(d)(5)(i), indebtedness is an SPVL only if it was originally 
incurred by the taxpayer. Accordingly, the Treasury Department and the 
IRS clarify that in the event a new borrower is added to indebtedness 
as part of a refinancing of an SPVL, the indebtedness continues to be 
an SPVL with respect to the original obligor(s), but is not an SPVL 
with respect to the new obligor(s).
    One commenter requested clarification as to whether interest 
attributable to prior vehicle loan balances on an SPVL that are rolled 
into a new loan as part of a refinancing may be included in the new 
SPVL to the extent those balances are part of the amount financed. The 
final regulations provide that the amount of a new loan, to the extent 
attributable to accrued but unpaid interest on the refinanced SPVL, may 
qualify as an SPVL provided all the other requirements to be an SPVL 
are satisfied.
E. Applicable Passenger Vehicle (APV)
    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 GVWR 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.
1. Original Use
    Section 163(h)(4)(D) provides, in relevant part, that for a vehicle 
to be an APV, the original use of the vehicle must commence with the 
taxpayer. Proposed Sec.  1.163-16(e)(2)(i) provided that 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, proposed Sec.  1.163-16(e)(2)(i) provided that 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, proposed 
Sec.  1.163-16(e)(2)(i) provided that original use of the vehicle does 
not commence with that purchaser unless the vehicle is treated as a new 
vehicle under the loan documentation.
    One commenter requested clarity regarding the definition of ``new 
vehicle'' in proposed Sec.  1.163-16(e)(2)(i). The Treasury Department 
and the IRS clarify that the requirement that a vehicle be treated as a 
new vehicle under the loan documentation refers to the lender's 
classification of the vehicle for purposes of its financing programs.
    Multiple commenters recommended that the definition of APV be 
extended to include used or ``nearly-new'' vehicles. Several of these 
commenters noted that the definition should be changed because lower-
income taxpayers cannot afford to purchase new vehicles. Section 
163(h)(4)(D) provides, in relevant part, that for a vehicle to be an 
APV, the original use of the vehicle must commence with the taxpayer. 
If the original use of a vehicle commences with a person other than the 
taxpayer, the vehicle is not an APV in the hands of the taxpayer. 
Allowing a taxpayer that does not satisfy the original use requirement 
to treat the vehicle as an APV would be in direct conflict with the 
plain language of the statute and congressional intent. Accordingly, 
the Treasury Department and the IRS decline to adopt this 
recommendation.
    Multiple commenters noted that State vehicle titling and 
registration requirements for demonstrator vehicles vary by State, 
leading to differing consumer outcomes in different jurisdictions. 
Specifically, the commenters noted that in States that require a dealer 
to title or register demonstrator vehicles, the original use of that 
vehicle would always commence with the dealer and therefore would never 
commence with a purchaser that is not a dealer. One commenter noted 
that this rule is arbitrary, and recommended the final regulations 
provide that original use of a vehicle be deemed to commence with the 
first purchaser that is not a dealer, notwithstanding any prior 
temporary use or titling by the dealer for demonstrator or service 
vehicle purposes.
    The Treasury Department and the IRS understand and appreciate that 
taxpayers are concerned that dealers' prior use of vehicles could 
prevent original use from commencing with a subsequent purchaser that 
is not a dealer, including concerns that this result may vary among 
States. Accordingly, Sec.  1.163-16(e)(2)(ii) provides that original 
use of a vehicle held by a dealer does not commence with the dealer if 
the vehicle is held primarily for sale to customers in the ordinary 
course of its trade or business, and as a result the dealer is not 
considered to be the first person that takes delivery of the vehicle 
after it is sold, registered, or titled as described in Sec.  1.163-
16(e)(2)(i). However, original use of a vehicle may commence with a 
dealer if the vehicle is held by the dealer for any purpose other than 
primarily for sale to customers in the ordinary course of its trade or 
business. For example, a dealer may own a service vehicle that is not 
held primarily for sale to customers and instead is used to support the 
dealer's business operations, such as use as a customer loaner. 
Original use of this service vehicle will generally begin with the 
dealer. In contrast, a dealer may own a demonstrator vehicle that is 
held primarily for sale to customers and is used for customer test 
drives. Original use of this demonstrator vehicle will generally not 
begin with the dealer and instead may begin with a customer that 
purchases the vehicle. This rule is

[[Page 57220]]

consistent with similar concepts in the Code, such as the original use 
requirement for certain property to be eligible for the additional 
first year depreciation deduction under section 168(k)(2)(A)(ii) of the 
Code. Section 1.168(k)-2(b)(3)(i) and (b)(3)(ii)(A) provide in relevant 
part that depreciable property meets the requirement if the original 
use of the property commences with the taxpayer. Section 1.168(k)-
2(b)(3)(ii)(A) explains that original use means the first use to which 
the property is put, whether or not that use corresponds to the use of 
the property by the taxpayer. Example 2 in Sec.  1.168(k)-
2(b)(3)(vii)(B) applies the original use requirement to a dealer's use 
of a vehicle as a demonstrator for prospective customers while the 
vehicle is held primarily for sale to customers in the ordinary course 
of the dealer's business, concluding that the dealer's ``use'' of a 
vehicle as a demonstrator does not constitute ``original use'' of the 
vehicle for the purposes of meeting the original use requirement. 
Similarly, Sec.  1.163-16(e)(2)(v)(A) (Example 1: Demonstrator 
vehicles) of the final regulations addresses how Sec.  1.163-
16(e)(1)(i) and (e)(2) apply when a vehicle is used by a dealer as a 
demonstrator vehicle while primarily being held for sale to customers 
in the ordinary course of its trade or business.
    Additionally, consistent with proposed Sec.  1.163-16(e)(2)(i), 
Sec.  1.163-16(e)(2)(i) provides that in the case of any purchaser that 
incurs indebtedness for the vehicle purchase, original use of the 
vehicle does not commence with that purchaser unless the loan 
documentation treats the vehicle as a new vehicle. This rule aligns 
with the requirement in section 163(h)(4)(D)(i) that for a vehicle to 
be an APV, the original use of the vehicle for which indebtedness is 
incurred must commence with the taxpayer.
    One commenter asked how the proposed original use rule in proposed 
Sec.  1.163-16(e)(2)(i) would apply in the case of two individuals who 
purchase a vehicle when both individuals are listed on the vehicle's 
title and are obligors on the loan incurred to finance the purchase. 
Alternatively, the commenter asked how the proposed rule applied if the 
two individuals purchase the vehicle and are obligors on the loan 
incurred to finance the purchase, but only one of the individuals is 
listed on the title.
    The Treasury Department and the IRS confirm that if a vehicle is 
purchased by more than one person, then original use of that vehicle 
may commence with each of these purchasers. Accordingly, Sec.  1.163-
16(e)(2)(iii) provides that if more than one person purchases a vehicle 
and one of these purchasers is the first person that takes delivery of 
the vehicle after the vehicle is sold, registered, or titled, then each 
of these purchasers is considered to be the first person that takes 
delivery of the vehicle after the vehicle is sold, registered, or 
titled as described in Sec.  1.163-16(e)(2)(i).
    Multiple commenters requested clarity regarding the application of 
the proposed original use rule in the case of a leased vehicle that is 
eventually purchased by the lessee.
    The Treasury Department and the IRS understand that leased vehicles 
are often purchased by the lessee either during or at the end of the 
vehicle lease term. It is common for original use of a leased vehicle 
to commence with the lessor, in which case original use would not 
commence with a lessee that purchases the vehicle. Additionally, if a 
lessee purchases a vehicle during or at the end of a vehicle lease term 
and finances that purchase by incurring a loan, the loan documentation 
generally does not treat the vehicle as a new vehicle. As a result, the 
original use of the vehicle would not commence with the lessee under 
Sec.  1.163-16(e)(1)(i). Section 1.163-16(e)(2)(v)(C) (Example 3: 
Vehicle purchase following a lease) addresses how Sec.  1.163-
16(e)(1)(i) and (e)(2) apply when a lessee purchases a vehicle at the 
end of the lease term.
    Multiple commenters requested clarification regarding whether 
original use of a vehicle manufactured in a prior year but not 
purchased until a subsequent year (for example, a 2025 model year 
vehicle that was sold to a purchaser that is not a dealer in 2026 after 
the manufacturer's release of a 2026 model year vehicle) may commence 
with the purchaser. The Treasury Department and the IRS confirm that 
original use of a vehicle commences with a taxpayer as described in 
Sec.  1.163-16(e)(2), regardless of whether the vehicle was 
manufactured in a prior year but not sold until a subsequent year.
2. Vehicles With Temporary Living Quarters
    One commenter requested clarity regarding whether a self-propelled 
vehicle designed to provide temporary living quarters for recreational, 
camping, or seasonal use could be an APV. In order to be an APV, a 
vehicle must meet the requirements to be an APV at the time of 
purchase. The Treasury Department and the IRS confirm that a vehicle 
that meets the section 163(h)(4)(D) requirements at the time of 
purchase will be considered an APV, regardless of whether the vehicle 
was designed to provide temporary living quarters.
3. Final Assembly
    Section 163(h)(4)(D) provides that the definition of APV does not 
include any vehicle the final assembly of which did not occur within 
the United States. Section 163(h)(4)(E)(i) provides that, for the 
purposes of section 163(h)(4)(D), 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. Proposed Sec.  1.163-16(e)(3) provided 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). Further, the 
preamble to the proposed regulations provided that taxpayers could 
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>.
    One commenter recommended that APVs should include all new vehicles 
regardless of where the vehicles are manufactured. Another commenter 
recommended an exemption to the final assembly requirement for any 
vehicle manufactured by certain large U.S. vehicle manufacturers. The 
Treasury Department and the IRS do not adopt these recommendations 
because section 163(h)(4)(D) explicitly requires that a vehicle must 
have undergone final assembly in the United States to be an APV.
    One commenter noted that certain vehicle models with identical 
specifications may have undergone final assembly either in the United 
States or in other countries. Accordingly, the commenter recommended 
that the final assembly determination be made at the vehicle make-and-
model level rather than at the VIN level to ensure taxpayers purchasing 
the same model vehicle are not treated differently under the Code. 
Alternatively, the commenter recommended that transitional or safe 
harbor provisions be considered for vehicle models that may have 
undergone final assembly either in the United States or in other 
countries.

[[Page 57221]]

    The Treasury Department and the IRS understand that not all 
vehicles of the same make and model undergo final assembly in the same 
location and where a vehicle's final assembly occurred cannot be 
determined reliably from its make and model. For example, the final 
assembly of some vehicles of a make and model marketed by a U.S.-
headquartered manufacturer may in certain cases have occurred outside 
the United States, while some vehicles of a make and model marketed by 
a non-U.S.-headquartered manufacturer may have occurred in the United 
States. Nonetheless, section 163(h)(4)(D) explicitly provides that a 
vehicle must have undergone final assembly in the United States to be 
an APV. Accordingly, the Treasury Department and the IRS do not adopt 
this commenter's recommendations.
    One commenter noted that it was unclear what should be done if the 
NHTSA VIN Decoder website is unavailable. The Treasury Department and 
the IRS note that reliance on the vehicle's plant of manufacture as 
reported in the VIN (which can be checked on the NHTSA VIN Decoder 
website) to establish the location of final assembly is one non-
exclusive option provided by the IRS for taxpayers' convenience. A 
taxpayer may also determine where a vehicle's final assembly occurred 
by relying on the vehicle's final assembly point reported on the label 
affixed to the vehicle as described in 49 CFR 583.5(a)(3), which is 
sometimes referred to as the ``window sticker.''
F. Personal Use
    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(f)(1) provided that 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.
    One commenter asked if the personal use determination is made 
annually or only at the time the vehicle is purchased. Additionally, 
multiple commenters asked whether the personal use determination is 
affected by a change in the way a vehicle is used after the 
indebtedness is incurred.
    The Treasury Department and the IRS reaffirm that the personal use 
requirement in section 163(h)(4) is a requirement that must be 
satisfied at the time the indebtedness is incurred, and not an ongoing 
requirement. Accordingly, differences between expected use at the time 
the indebtedness is incurred and later actual use of the vehicle do not 
affect the personal use determination.
    One commenter noted that the proposed regulations would complicate 
recordkeeping and the audit process by requiring taxpayers that use a 
vehicle for personal and business purposes to allocate interest between 
QPVLI and business interest.
    Proposed Sec.  1.163-16(g)(2) provided that taxpayers may deduct 
independently deductible interest (generally, interest that is QPVLI 
and that also is deductible as a different type of interest under 
section 163(a) or a different section of the Code) as either QPVLI or 
as a different type of interest as described in proposed Sec.  1.163-
16(g)(1). Accordingly, taxpayers that use a vehicle for personal and 
business purposes are not required to allocate interest between QPVLI 
and business interest, but may choose to do so.
G. QPVLI Limitations
1. Dollar Limitation
    Section 163(h)(4)(C)(i) provides that the deduction allowed for 
QPVLI by a taxpayer for any taxable year cannot exceed $10,000. 
Proposed Sec.  1.163-16(h)(1) provided that 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.
    One commenter requested that the Treasury Department and the IRS 
clarify how the rules work if a taxpayer has multiple SPVLs. The 
commenter recommended that taxpayers be able to aggregate interest from 
all SPVLs to determine QPVLI and apply the $10,000 per return limit to 
this total amount.
    The Treasury Department and the IRS clarify that under section 
163(h)(4) a taxpayer with multiple SPVLs may aggregate interest from 
these loans to determine the total amount of QPVLI prior to applying 
the $10,000 per return limit.
2. Modified Adjusted Gross Income Phaseout
    Section 163(h)(4)(C)(ii) provides and proposed Sec.  1.163-16(h)(2) 
provided 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 (MAGI) 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 and 
proposed Sec.  1.163-16(h)(2) provided that this reduction begins after 
the taxpayer's MAGI exceeds $200,000.
    Multiple commenters requested clarification regarding the 
application of the MAGI phaseout to taxpayers that file a Federal 
income tax return with a filing status of head of household. The MAGI 
phaseout thresholds for all taxpayers are explicitly set by section 
163(h)(4)(C)(ii), which provides two specific dollar amount thresholds: 
a $200,000 phaseout threshold applicable to joint filers and a $100,000 
phaseout threshold applicable to all other taxpayers, including 
taxpayers that have a filing status of head of household. Accordingly, 
comments requesting a change in the phaseout threshold amount for 
taxpayers that have a filing status of head of household are not 
adopted.
    Multiple commenters recommended that final regulations increase the 
MAGI phaseout thresholds. One of these commenters requested a separate 
increased threshold for taxpayers that file a Federal income tax return 
with a filing status of head of household. The Treasury Department and 
the IRS decline to adopt these recommendations because section 
163(h)(4)(C)(ii) explicitly provides the MAGI phaseout thresholds for 
all taxpayers.
    Multiple commenters recommended that the MAGI phaseout reduce the 
$10,000 annual limitation on QPVLI under section 163(h)(4)(C)(i), 
rather than reduce the amount otherwise deductible as QPVLI under 
section 163(a). Section 163(h)(4)(C)(ii) explicitly requires that the 
amount otherwise allowable as a deduction under section 163(a) be 
reduced as a taxpayer's MAGI exceeds the applicable dollar amount 
thresholds. Accordingly, the Treasury Department and the IRS do not 
adopt these recommendations.
H. 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. Because business entities cannot satisfy the 
personal use requirement, proposed Sec.  1.163-16(a)(2)(i) provided 
that only individuals, decedents' estates, and non-grantor trusts may 
deduct QPVLI.

[[Page 57222]]

    One commenter requested that the Treasury Department and the IRS 
clarify in the final regulations whether nonresident alien individuals 
may deduct QPVLI. The commenter noted that section 873(b) of the Code 
lists the nonbusiness deductions allowed for nonresident alien 
individuals and does not include QPVLI in this list.
    The Treasury Department and the IRS agree with the commenter that 
clarification on whether nonresident alien individuals may deduct QPVLI 
is needed. With limited exceptions, a nonresident alien individual is 
not allowed deductions that are not connected with income that is 
effectively connected with the conduct of a U.S. trade or business. See 
section 873. Thus, a nonresident alien individual will generally not be 
allowed to deduct QPVLI, which relates to indebtedness incurred to 
purchase an APV for personal use. However, in limited circumstances, 
interest connected to income that is effectively connected with the 
conduct of a U.S. trade or business will qualify as QPVLI. For example, 
a nonresident alien individual that purchases an APV primarily for 
personal use may also use the APV as part of his or her trade or 
business, and thus may pay interest that qualifies as QPVLI. See part 
II.F (Personal Use) of this Summary of Comments and Explanation of 
Revisions. In that case, the nonresident alien individual would be 
allowed under Sec.  1.163-16(g)(2) to deduct the interest connected to 
that business as either QPVLI or as business interest expense. This 
same analysis would apply to a decedent's estate that is a foreign 
estate or a non-grantor trust that is a foreign trust, each of which 
computes its taxable income in the same manner as a nonresident alien 
individual. See section 641(b) of the Code. The Treasury Department and 
the IRS intend to modify the instructions for the relevant forms to 
clarify that a nonresident alien individual, foreign estate, or foreign 
non-grantor trust is not allowed to deduct QPVLI, except in the limited 
circumstances described in this paragraph.
    One commenter requested that U.S. citizens residing in the 
Commonwealth of Puerto Rico that are required to file a Federal tax 
return be allowed to deduct QPVLI. U.S. citizens residing in the 
Commonwealth of Puerto Rico that are required to file a Federal tax 
return are generally entitled to claim deductions to the extent those 
deductions are properly allocated and apportioned pursuant to the rules 
under sections 861 and 933 of the Code and the regulations thereunder. 
Accordingly, these taxpayers may be eligible to deduct QPVLI, subject 
to the allocation and apportionment rules in sections 861 and 933.
    One commenter recommended that individuals with any filing status 
(including single, married filing jointly, and head of household) 
should be able to deduct QPVLI. The Treasury Department and the IRS 
confirm that filing status does not impact QPVLI deduction eligibility.

III. Comments on Proposed Sec.  1.6050AA-1

A. In General
    In order to make the regulations more readable, the final 
regulations include two revisions to the proposed rules that move 
language from the definitions in Sec.  1.6050AA-1(b) to other 
paragraphs in Sec.  1.6050AA-1. First, the language in proposed Sec.  
1.6050AA-1(b)(3)(ii) (Interest received on behalf of another person) 
has been moved to new Sec.  1.6050AA-1(c), and the subsequent 
paragraphs in Sec.  1.6050AA-1(b) have been finalized accordingly. 
Second, the language in proposed Sec.  1.6050AA-1(b)(2)(ii) (De minimis 
rule) and (e) (Amount of interest received on SPVL for calendar year) 
have been grouped together in new Sec.  1.6050AA-1(f)(1) and (2), 
respectively. As a result, the language in proposed Sec.  1.6050AA-
1(b)(2)(i) has been moved to Sec.  1.6050AA-1(b)(2) and the heading in 
proposed Sec.  1.6050AA-1(b)(2)(i) has been deleted. As discussed more 
fully in this part III of the Summary of Comments and Explanation of 
Revisions (Comments on Proposed Sec.  1.6050AA-1), the substantive 
contents of these provisions have not been revised in the final 
regulations.
B. Definitions
1. Applicable Passenger Vehicle (APV)
    Section 6050AA(d)(1) provides that terms used in section 6050AA 
have the same meaning as when used in section 163(h)(4). The term APV 
is used in section 6050AA(b)(2)(E) and (d)(2). 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.
    Proposed Sec.  1.6050AA-1(b)(1) provided that the term ``applicable 
passenger vehicle'' or ``APV'' has the same meaning as that provided in 
section 163(h)(4)(D) and proposed Sec.  1.163-16(b)(1). Proposed Sec.  
1.163-16(b)(1) provided that a vehicle is an ``applicable passenger 
vehicle'' or ``APV'' if it satisfies the requirements set forth in 
proposed Sec.  1.163-16(e)(1). Proposed Sec.  1.163-16(e)(1) further 
provided 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(e)(2) and 
(3), respectively, provided rules for determining whether original use 
commences with the taxpayer and whether final assembly occurred in the 
United States.
    Many commenters expressed general disapproval of the requirement 
for interest recipients to determine if a vehicle is an APV, a vehicle 
that satisfies the requirements that are set forth in section 
163(h)(4)(D) and proposed Sec.  1.163-16(b)(1). These commenters 
generally claimed that it would be burdensome for interest recipients 
to determine if a vehicle is an APV because interest recipients do not 
currently have the information necessary to make this determination. 
Specifically, several commenters claimed that interest recipients do 
not currently maintain records that include whether the vehicle's 
original use commences with the borrower, the vehicle's GVWR, where the 
vehicle's final assembly occurred, or whether the vehicle satisfies 
other APV requirements. These commenters generally recommended that the 
final regulations allow interest recipients to report interest on all 
vehicle loans and recommended that individual taxpayers seeking to 
claim the deduction alone should determine whether their vehicle 
qualifies as an APV.
    The Treasury Department and the IRS acknowledge the concerns raised 
by these commenters and are aware that interest recipients may need to 
collect additional information to determine whether a vehicle is an 
APV. However, as a result of the statutory interaction between sections 
6050AA(d)(1) and 163(h)(4)(D), determining whether a vehicle is an APV 
is necessary to determine whether reporting is required under section 
6050AA. See part II.E of this Summary of Comments and Explanation of 
Revisions (Applicable Passenger Vehicle (APV)) for a discussion of the 
regulations under section 163(h)(4)(D). In addition, taxpayers need the 
information reported under section 6050AA to accurately complete their 
Federal income tax returns. Information reported on the Form 1098-VLI, 
Vehicle Loan Interest Statement, such as the vehicle's VIN, whether the 
original use of the vehicle began with the purchaser (payor of record), 
and whether final assembly occurred in the United States, will enable 
taxpayers to accurately claim the QPVLI deduction.

[[Page 57223]]

    Several commenters discussed their concerns about using a vehicle's 
VIN to verify where a vehicle's final assembly occurred. One commenter 
indicated that the commenter understands the vehicle's VIN indicates 
the plant of manufacture; however, the commenter noted that while 
taxpayers and dealers have access to the vehicle's window label, the 
interest recipient may not. One commenter requested simplified VIN and 
final assembly verification. Another commenter requested that the final 
regulations allow interest recipients to report the VIN reflected in 
their records without requiring the interest recipients to verify where 
a vehicle's final assembly occurred.
    The statutory text of section 6050AA(b)(2)(E) requires interest 
recipients to report VINs. See part III.F of this Summary of Comments 
and Explanation of Revisions (Requirement to File an Information 
Return) for a discussion of the requirement to report the APV's VIN. 
Although these interest recipients may not currently have easy access 
to a VIN, they must obtain VINs to comply with their statutory 
information reporting obligations. Further, the Treasury Department and 
the IRS understand the VIN and the NHTSA VIN lookup tool can be used to 
determine whether a vehicle has a GVWR of less than 14,000 pounds and 
whether the final assembly of the vehicle occurred within the United 
States. Accordingly, no changes are made in the final regulations to 
the text of proposed Sec.  1.6050AA-1(b)(1) in response to these 
comments.
    Other commenters requested safe harbor provisions related to the 
determination of whether a vehicle is an APV. One commenter requested 
that the Treasury Department and the IRS consider including a safe 
harbor in the final regulations to allow interest recipients to rely on 
dealer or manufacturer data to make the APV determination. Another 
commenter requested that the Treasury Department and the IRS provide a 
safe harbor in the final regulations allowing lenders to rely on loan 
documentation and dealer certifications regarding new vehicle status 
and original use.
    The Treasury Department and the IRS decline to adopt a safe harbor 
for interest recipients with respect to determining whether a vehicle 
satisfies the requirements of section 163(h)(4)(D). Section 6001 of the 
Code provides that every person liable for tax or the collection 
thereof must keep such records, render such statements, make such 
returns, and comply with such rules and regulations as may be 
prescribed. Under Sec.  1.6001-1(a), any person required to file a 
return of information with respect to income must keep such permanent 
books of accounts or records sufficient to establish the matters 
required to be shown in any return of such information. This includes 
all of the information required by section 6050AA, which is information 
that lenders can obtain. The general recordkeeping requirements require 
interest recipients to establish the items required to be shown on the 
section 6050AA information return. See part III.B.2 of this Summary of 
Comments and Explanation of Revisions (Specified Passenger Vehicle Loan 
(SPVL)) for a discussion of interest recipients' obligations when the 
vehicle is refinanced.
2. 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) provided that 
the term ``specified passenger vehicle loan'' or ``SPVL'' has the 
meaning provided in proposed Sec.  1.163-16(b)(15). Proposed Sec.  
1.163-16(b)(15) provided that ``specified passenger vehicle loan'' or 
``SPVL'' means indebtedness that satisfies the requirements set forth 
in proposed Sec.  1.163-16(d)(1). Proposed Sec.  1.163-16(d)(1) 
provided that SPVL means 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.
    Many commenters requested that the final regulations not require 
interest recipients to report interest received on an SPVL. In general, 
these commenters requested that the final regulations require interest 
recipients to report interest received on any vehicle loan rather than 
only on an SPVL. Most of these commenters claimed interest recipients 
do not currently possess sufficient information to determine whether a 
loan is an SPVL.
    Many commenters indicated that interest recipients do not currently 
collect or maintain information relating to whether a loan meets the 
requirements of section 163(h)(4)(B). Some commenters claimed that 
specific interest recipients, including credit unions, do not currently 
track all the information necessary to determine the interest allocable 
to different components of a vehicle loan. Other commenters claimed 
that interest recipients do not currently track interest allocable to 
negative equity or the amount of nonqualifying indebtedness.
    Some commenters requested that the final regulations include safe 
harbors that would allow the interest recipients to report interest 
received on any vehicle loan rather than the amount of interest 
received only on an SPVL. One commenter requested that the final 
regulations include a safe harbor under which interest recipients are 
not required to allocate interest between qualifying and non-qualifying 
portions of the vehicle loan. Another commenter requested that the 
final regulations include a safe harbor allowing interest recipients to 
provide interest statements to any borrower who paid $600 or more in 
interest on a vehicle-secured loan, accompanied by a disclaimer.
    Some commenters indicated their view that certain requirements of 
section 163(h)(4)(B) are known only to the taxpayer. Some commenters 
claimed that only taxpayers are able to know whether the vehicle loan 
was incurred for the purchase of an APV for personal use. Others 
claimed that vehicle finance companies process changes of party to 
vehicle finance contracts from time to time, but do not currently have 
data regarding whether the death of the original payor of record is the 
reason for such transfer. These commenters generally requested that the 
final regulations require that the taxpayer, rather than the interest 
recipient, be responsible for determining whether a vehicle loan is an 
SPVL.
    The statutory language does not support permitting interest 
recipients to report interest received on all vehicle loans. Section 
6050AA(a) provides that the information return relates to interest 
received on an SPVL. Section 6050AA(b)(2) provides that the information 
return filed by the interest recipient must include the amount of such 
interest received for the calendar year. The interest referred to in 
section 6050AA(b)(2) is the interest received on an SPVL. The Treasury 
Department and the IRS understand that the definition of SPVL in Sec.  
1.6050AA-1(b)(7) may require interest recipients to collect information 
they do not currently collect. However, the statute requires reporting 
of interest received on an SPVL, not vehicle loan interest in general.
    Several commenters discussed whether interest recipients can 
determine whether a taxpayer expects to use the vehicle for personal 
use. One commenter requested that the final regulations provide an 
objective, standardized mechanism for establishing personal use at 
origination that credit unions can document through ordinary loan 
records. Another commenter requested that the final

[[Page 57224]]

regulations provide that interest recipients need only rely on the 
information contained in the retail installment sales contract. This 
commenter also requested that the final regulations include a safe 
harbor regarding the personal use of the vehicle.
    The Treasury Department and the IRS understand that interest 
recipients may not currently have documentation necessary to determine 
whether the personal use requirement is met. While retail installment 
sales contracts may include some indication of whether a vehicle is 
purchased for personal or business use, this is not true of all such 
contracts. Further, even when a contract includes some indication of 
use, this information may not be available to assignees of the loan. If 
the information in the contract is sufficient for the interest 
recipient to determine that the personal use requirement is met, then, 
in the absence of conflicting information, the interest recipient may 
rely on that information. With respect to other contracts, the interest 
recipient may choose to make arrangements to obtain information 
regarding personal use from the obligor, from the lender of record, or 
by other means. In addition, interest recipients may rely on the same 
evidence of personal use as the obligor.
    Several commenters discussed what they consider to be unique issues 
when an SPVL is refinanced. In general, these commenters claimed that 
interest recipients after refinancing do not currently have access to 
the information needed to verify that the refinanced debt was an SPVL 
in the first instance. One commenter noted that there are currently no 
reliable mechanisms to confirm whether the borrower was the original 
owner during a refinance transaction or whether a refinanced vehicle 
was purchased during a qualifying year.
    Some commenters requested that the final regulations adopt 
different, specific reporting requirements when a vehicle-secured loan 
is refinanced. These commenters claimed that, in a typical vehicle 
refinance transaction, lenders do not receive a copy of the prior 
retail installment sales contract, and that refinance lenders generally 
receive limited information. Some commenters recommended that the final 
regulations clarify that interest recipients may report interest paid 
on vehicle-secured refinance loans without making determinations 
regarding original purchase eligibility and that vehicle eligibility 
determinations remain solely with the taxpayer. One commenter requested 
that the final regulations allow lenders to treat the entire refinanced 
amount as an SPVL, up to the payoff amount reflected on the prior 
lender's payoff statement, without ongoing pro rata interest allocation 
that lender systems are not currently designed to perform. Another 
commenter requested that the final regulations clarify that, for 
purposes of section 6050AA reporting, interest recipients may rely on a 
signed borrower certification of original ownership.
    The Treasury Department and the IRS acknowledge the concerns raised 
by these commenters and are aware that interest recipients may need to 
collect more information with respect to refinanced vehicle loans in 
order to determine whether the vehicle loan is an SPVL. However, as a 
result of the interaction between sections 6050AA(d) and 163(h)(4)(B), 
determining whether the vehicle loan is an SPVL is necessary to 
determine whether reporting is required under section 6050AA. 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. The statute does not include separate 
rules for reporting interest received on an SPVL that meets the 
requirements of section 163(h)(4)(E)(ii). Accordingly, interest 
recipients must perform adequate diligence to meet their reporting 
requirements for refinanced SPVLs.
    Some commenters noted that it would be useful for the amount of 
interest reported under section 6050AA to be the same as the amount of 
interest an eligible borrower would be allowed to deduct. The Treasury 
Department and the IRS agree with these commenters. The Treasury 
Department and the IRS acknowledge that it is not possible for interest 
recipients to know whether the amount of the SPVL is limited by the 
dollar or MAGI limitations in section 163(h)(4)(C). Therefore, to 
minimize the risk of recipients claiming an interest deduction that 
exceeds the limitation imposed by section 163(h)(4)(C), Sec.  1.6050AA-
1(h)(2)(iv) requires that the written statement from the interest 
recipient include a legend stating that the payor of record may be 
unable to deduct the full amount of interest reported on the statement. 
See part III.G of this Summary of Comments and Explanation of Revisions 
(Requirement to Furnish a Written Statement) for a further discussion 
of the legend.
3. Calendar Year
    Proposed Sec.  1.6050AA-1(b)(2) provided that the calendar year for 
which interest is received is the later of the calendar year for which 
interest is received or the calendar year in which the interest 
properly accrues. Proposed Sec.  1.6050AA-1(b)(2)(ii) permitted an 
interest recipient to report, as interest received during the calendar 
year, prepaid interest properly accruing by the following January 15.
    One commenter requested guidance for handling payment reversals 
that cross calendar years and other corrections that occur after year-
end processing cutoffs.
    The Treasury Department and the IRS decline to include a rule in 
the final regulations on how to correct information returns under 
section 6050AA. IRS Publication 1099, General Instructions for Certain 
Information Returns, includes information on how to file corrected 
information returns and interest recipients should use those 
instructions to determine how to file any corrected returns.
    In order to make the regulations more readable, however, the 
language in proposed Sec.  1.6050AA-1(b)(2)(ii) (De minimis rule) has 
been moved to new Sec.  1.6050AA-1(f)(1) and the heading has been 
updated.
4. Interest Recipient
    Proposed Sec.  1.6050AA-1(b)(3) provided 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 money, and who, in the 
course of that trade or business, receives interest on an SPVL. When a 
person collects interest on an SPVL on behalf of another, proposed 
Sec.  1.6050AA-1(b)(3)(ii) provided that 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, 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, 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.
    One commenter requested clarification regarding which party

[[Page 57225]]

should be considered the interest recipient in a securitization 
structure for retail installment sales contracts. This commenter also 
requested confirmation that parties may contractually delegate 
reporting obligations to another party and, when a delegation occurs, 
clarification of which party bears the obligation for a given calendar 
year.
    No modifications are needed in the final regulations to the text of 
proposed Sec.  1.6050AA-1(b)(3) in response to this comment. Home 
mortgages have historically been securitized, and the final regulations 
are similar to the interest recipient rules for mortgage interest in 
Sec.  1.6050H-1(c). The Treasury Department and the IRS decline to 
provide an example regarding the specific fact pattern included in the 
comment. However, the new examples in Sec.  1.6050AA-1(c)(5) generally 
illustrate the effect of the definition when a car loan is securitized.
    The Treasury Department and the IRS understand that when a vehicle 
loan is securitized the interest recipient may not currently have ready 
access to the information necessary to determine if a vehicle satisfies 
the requirements to be an APV, or information regarding whether a loan 
is an SPVL. However, as discussed in parts III.B.1 and III.B.5 of this 
Summary of Comments and Explanation of Revisions (Applicable Passenger 
Vehicle (APV) and Specified Passenger Vehicle Loan (SPVL), 
respectively), such determinations are required by statute.
    One commenter requested that the regulations address how reporting 
obligations should be satisfied if the interest recipient enters 
bankruptcy or is otherwise unable to report for a calendar year. The 
Treasury Department and the IRS decline to address the consequences of 
bankruptcy on an interest recipient's reporting obligation because it 
is outside the scope of these regulations.
    To make the regulations more readable, the language in proposed 
Sec.  1.6050AA-1(b)(3)(ii) (Interest received on behalf of another 
person) has been moved to new Sec.  1.6050AA-1(c). As a result, the 
language in proposed Sec.  1.6050AA-1(b)(3)(i) has been moved to Sec.  
1.6050AA-1(b)(3) and the heading in proposed Sec.  1.6050AA-1(b)(3)(i) 
has been deleted. In addition, the new examples in Sec.  1.6050AA-
1(c)(5) illustrate the reporting obligation when a person collects 
interest on an SPVL on behalf of another when a car loan is 
securitized.
5. Payor of Record
    Proposed Sec.  1.6050AA-1(b)(5) defined 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. 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). Proposed Sec.  1.6050AA-
1(b)(5) also provided that the term ``person'' for the purposes of 
proposed Sec.  1.6050AA-1(b)(5) means any individual, decedent's 
estate, or non-grantor trust.
    One commenter supported the proposed definition of payor of record. 
This commenter requested confirmation that only one written statement 
per SPVL per year is required and acceptable, even if the loan has more 
than one borrower. The Treasury Department and the IRS confirm that as 
a result of the interaction between Sec.  1.6050AA-1(b)(5) and (a)(2), 
when there are co-borrowers on an SPVL, only the payor of record is 
required to be furnished a written statement on the SPVL under Sec.  
1.6050AA-1(a)(2)(ii).
    Another commenter requested clarification on what, if any, 
reporting obligations exist when the borrower is deceased at the time 
of the filing deadline. This commenter requested that the final 
regulations include guidance confirming that the interest recipient may 
rely on available public records, correspondence, or obligor account 
status indicators to determine whether to furnish a statement and that 
furnishing to the estate or co-obligor would satisfy the furnishing 
requirement.
    No modifications are needed in the final regulations to the text 
used in proposed Sec.  1.6050AA-1(b)(5). As a result of the interaction 
between Sec.  1.6050AA-1(b)(5) and (a)(2), only the payor of record 
would be furnished a written statement on the SPVL under Sec.  
1.6050AA-1(a)(2)(ii). The payor of record on the SPVL can be a 
decedent's estate, and the death of the borrower does not eliminate the 
statutory reporting requirement.
C. Reporting by 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. 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) of the Code) 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.
    One comment requested guidance regarding the information reporting 
obligations of foreign persons holding securitized interests in a 
vehicle loan. The Treasury Department and the IRS do not believe it is 
necessary to provide any additional clarification in response to this 
comment because foreign persons holding securitized interests in a 
vehicle loan with reporting obligations under section 6050AA are 
subject to the same requirements as domestic interest recipients 
holding securitized interests in a vehicle loan.
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) provided that the reporting 
requirement of section 6050AA does not apply if the payor of record is 
a nonresident alien, foreign decedent's estate, or foreign non-grantor 
trust. Proposed Sec.  1.6050AA-1(d)(2) provided the documentation rules 
that the interest recipient is required to follow to determine whether 
the payor of record is a nonresident alien individual, foreign 
decedent's estate, or foreign non-grantor trust.
    Some commenters requested changes to proposed Sec.  1.6050AA-
1(d)(1) in the final regulations. One commenter requested specific 
language in the final regulations noting that the payor of record is 
presumed to be a U.S. person for section 6050AA purposes. Another 
commenter claimed that vehicle finance companies do not necessarily 
have data regarding the legal status of customers and requested that 
proposed Sec.  1.6050AA-1(d)(2) and (3) be deleted in the final 
regulations so that finance companies are not required to determine the 
legal status of the payor of record.
    The Treasury Department and the IRS understand the concern that 
vehicle finance companies may not currently have the documentation 
necessary to determine whether a particular payor of record is a 
nonresident alien individual, foreign decedent's estate, or foreign 
non-grantor trust. However, the documentation rules that the interest 
recipient is required to follow are similar to the longstanding rules 
applicable to nonresident alien individuals who pay mortgage interest 
in Sec.  1.6050H-1(d)(2). Accordingly, the Treasury Department and the 
IRS decline to modify the reporting requirement of section 6050AA in 
the case of a payor of record that is a nonresident alien individual, 
foreign decedent's estate, or foreign non-grantor trust.

[[Page 57226]]

E. Amount of Interest Received on an SPVL for the Calendar Year
    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. To make the regulations easier to read, the 
language in proposed Sec.  1.6050AA-1(b)(2)(ii) (De minimis rule) and 
(e) (Amount of interest received on SPVL for calendar year) have been 
grouped together in new Sec.  1.6050AA-1(f)(1) and (2), respectively, 
and new headings have been added to the paragraphs. The contents of 
proposed Sec.  1.6050AA-1(e) have not been changed.
F. Requirement To File an 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 
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 VIN of the APV that secures 
that loan (or such other description of that vehicle as the Secretary 
may prescribe), and (F) any other information as the Secretary may 
prescribe.
    Under proposed Sec.  1.6050AA-1(f), 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.
    Some commenters discussed the requirement to file an information 
return with the IRS. One commenter recommended allowing interest 
recipients to submit a single information return detailing all SPVL 
transactions for the reporting period. Another commenter noted the 
requirement to report the VIN, year, make, model, loan origination 
date, acquisition date, outstanding principal balances, and lien status 
would require system modifications. Other commenters claimed that 
interest recipients may experience difficulties accurately reporting 
the VIN. One commenter recommended that the final regulations provide a 
safe harbor for minor clerical errors in VIN reporting.
    The Treasury Department and the IRS decline to change the 
requirement for interest recipients to file a return with the IRS for 
each SPVL, as this is expressly required by sections 6050AA(a) and 
6724(d)(1)(B). The items in proposed Sec.  1.6050AA-1(f) generally 
followed the items prescribed in section 6050AA(b)(2). The Treasury 
Department and the IRS understand that interest recipients may not 
currently track the VIN associated with the vehicle. Section 
6050AA(b)(2)(E) requires the interest recipient to report the VIN of 
the APV that secures the loan on which interest is received. The 
Treasury Department and the IRS cannot modify this statutory 
requirement; in addition, an accurate VIN will enable the interest 
recipients and the IRS to verify other statutorily mandated 
information. See part III.B.1 of this Summary of Comments and 
Explanation of Revisions (Applicable Passenger Vehicle (APV)) for a 
discussion of how to determine if a vehicle is an APV.
    One commenter requested clarification that the ``date acquired'' 
information ensures that the taxpayer can consolidate multiple 
information returns when there are multiple interest recipients for the 
same SPVL during the same calendar year. The Treasury Department and 
the IRS understand SPVLs may be sold or otherwise transferred to a new 
lender of record during the calendar year. The Treasury Department and 
the IRS confirm that the date acquired information provides the 
taxpayer with information regarding which period is covered by each 
information return rather than requiring consolidated reporting by 
multiple interest recipients.
G. Requirement To Furnish a Written Statement
    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).
    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. 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 would be required to include a legend identifying the 
statement as important tax information that is being furnished to the 
IRS and stating that penalties may apply if the payor of record 
overstates a deduction for interest reported on the statement. 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 SPVL interest reported on the 
statement.
    Several commenters claimed the interest recipients should not be 
required to furnish a written statement to the payor of record. In 
general, these commenters recommended allowing the interest recipient 
to provide the amount of interest received to the payor of record 
either on a monthly statement or via an online portal, similar to the 
requirements of Notice 2025-57. The Treasury Department and the IRS 
decline to change the requirement to furnish a statement to the payor 
of record, as this is expressly required by sections 6050AA(c) and 
6724(d)(2)(MM).
    Many commenters recommended that the Treasury Department and the 
IRS confirm that the taxpayer has the ultimate responsibility for 
determining whether and to what extent the taxpayer is able to claim 
the deduction allowed under section 163(h)(4). The Treasury Department 
and the IRS confirm the taxpayer has the ultimate responsibility for 
deductions claimed on the taxpayer's Federal income tax return. To 
minimize the risk of recipients claiming an interest deduction that is 
limited by section 163(h)(4)(C) or for which they are otherwise 
ineligible, the written statement must include a legend providing 
certain information.
    Some commenters discussed the legend described in proposed Sec.  
1.6050AA-1(g)(2)(iii). One commenter stated that the legend is quite 
lengthy and might be improved if simplified. Two commenters expressed 
concern that the legend inappropriately deputizes the interest 
recipient as an enforcement authority or tax deduction eligibility 
auditor.
    The Treasury Department and the IRS decline to make any changes to 
the legend in response to these comments. The legend described in Sec.  
1.6050AA-1(h)(2)(iii) is similar to the legend required on written 
statements reporting mortgage interest in Sec.  1.6050H-

[[Page 57227]]

2(b)(2)(ii) and (iii). The use of similar language is helpful to 
taxpayers and minimizes the risk of recipients being confused by any 
differences between the two forms. Finally, the legend reinforces the 
principle that it is the taxpayer who must make the final decision on 
whether and how much to claim as a deduction on the tax return.
    One commenter recommended that an option to provide an electronic 
statement to the payor be added to the final regulations. Another 
commenter recommended that the final regulations clarify that the 
written statement can be sent in an electronic form if the payor of 
record has consented to receiving disclosures electronically under the 
Electronic Signatures in Global and National Commerce Act (E-SIGN Act), 
Public Law 106-229, 114 Stat. 464 (June 30, 2000).
    The Treasury Department and the IRS decline to modify the rules 
regarding the electronic furnishing of certain payee statements because 
they are outside the scope of these regulations. The revenue procedure 
relating to electronic furnishing of certain payee statements is 
generally updated annually and is also reproduced as IRS Publication 
1179, General Rules and Specifications for Substitute Forms 1096, 1098, 
1099, 5498, and Certain Other Information Returns. See Rev. Proc. 2025-
22, 2025-30 I.R.B. 200, and Publication 1179 published July 21, 2025. 
The Treasury Department and the IRS emphasize that interest recipients 
can utilize existing procedures for electronic furnishing of the payee 
statement. Interest recipients can also provide comments on Notice 
2026-4, which requests comments on whether the Treasury Department and 
the IRS should modify the electronic furnishing requirements applicable 
to persons required to furnish payee statements. See Notice 2026-4, 
2026-13 I.R.B. 726 (March 23, 2026).
H. Transition Relief
    Several commenters recommended that the Treasury Department and the 
IRS extend the transition relief provided in Notice 2025-57. Other 
commenters recommended that the final regulations include a phased 
implementation timeline.
    The OBBBA was signed into law on July 4, 2025. Section 163(h)(4), 
as amended, and new section 6050AA apply to indebtedness incurred after 
December 31, 2024. The statute provides for reporting related to 
indebtedness incurred prior to the enactment of the OBBBA. The Treasury 
Department and the IRS understand that recipients needed time to make 
the necessary changes to their systems to comply with their new 
information reporting responsibility under section 6050AA. In Notice 
2025-57, the Treasury Department and the IRS provided transitional 
guidance with respect to the reporting obligations under section 6050AA 
with regard to interest that the recipient received on an SPVL in 
calendar year 2025. However, taxpayers need the information reported 
under section 6050AA to complete their personal income tax returns, and 
interest recipients will have had approximately 18 months from the 
enactment of the OBBBA to the time that they will need to begin 
reporting under section 6050AA. Therefore, the Treasury Department and 
the IRS are not including additional transitional guidance or phased 
implementation in the final regulations.
    Some commenters requested penalty relief for good-faith efforts 
made by interest recipients or reasonable cause relief during the 
initial compliance period. Another commenter requested that the 
Treasury Department and IRS clarify whether reasonable cause relief 
would apply when the interest recipient lacks access to necessary data 
despite commercially reasonable efforts. In the refinance context, one 
commenter requested confirmation that an interest recipient would not 
be penalized for relying in good faith on its books and records for 
identifying the payor of record and the information available to it in 
connection with refinancing, including borrower attestations and payoff 
documentation from the prior lender.
    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 6724(a) provides that no penalty may 
be imposed under sections 6721 and 6722 if it is shown that any such 
failure was due to reasonable cause and not willful neglect. The 
Treasury Department and the IRS have determined that providing 
additional safe harbors or reasonable cause relief is unnecessary in 
light of the statutory provision in section 6724(a).
    One commenter requested clarification on the interaction between 
the applicability date included in the final regulations and Notice 
2025-57. The Treasury Department and the IRS confirm that an interest 
recipient may satisfy the reporting obligations under section 6050AA 
for interest received in calendar year 2025 by satisfying the reporting 
obligations under section 6050AA for calendar year 2025 as described in 
Notice 2025-57.
I. Miscellaneous
    A couple of commenters discussed recordkeeping requirements. One 
commenter requested additional clarification on the recordkeeping and 
reporting requirements for taxpayers. Another commenter recommended 
adding a specific record retention requirement for recipients of 
interest to the final regulations in Sec.  1.6050AA-1.
    Taxpayers are required to maintain records that are sufficient to 
enable the IRS to determine their correct tax liabilities. See section 
6011 and Sec.  1.6001-1(a). The Treasury Department and the IRS have 
determined that providing additional record retention requirements for 
taxpayers is both unnecessary and outside the scope of these 
regulations. With respect to the information returns required by 
section 6050AA, it is unnecessary to prescribe specific recordkeeping 
requirements because Sec.  1.6050AA-1(g)(2) prescribes the information 
that must be reported by interest recipients.

IV. Explanation of Revisions to Proposed Sec. Sec.  301.6011-2, 
301.6721-1, and 301.6722-1

    The final regulations include a revision to proposed Sec.  
301.6011-2 to reflect that Form 1098-VLI is used to report information 
required under section 6050AA. The final regulations also include 
revisions to proposed Sec. Sec.  301.6721-1 and 301.6722-1 that are 
necessary as a result of correcting amendments to TD 9991, 91 FR 13220, 
published March 19, 2026. The language in proposed Sec.  301.6721-
1(j)(2) and (j)(2)(i) and proposed Sec.  301.6722-1(g)(2) and (g)(2)(i) 
were published in the correcting amendments to TD 9991 and are not 
republished in the final regulations. The language in proposed Sec.  
301.6721-1(j)(2)(ii) has been moved to Sec.  301.6721-1(j)(2)(iii). 
Second, the language in proposed Sec.  301.6722-1(g)(2)(ii) has been 
moved to Sec.  301.6722-1(g)(2)(iii). The contents of these provisions 
are not being revised in the final regulations.

[[Page 57228]]

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 final 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 final 
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 final regulations have been reviewed 
by OMB.
    This final rule 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 \2\ 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.
---------------------------------------------------------------------------

    \2\ References to a ``section'' are to a section of the Internal 
Revenue Code of 1986, as amended (Code), unless otherwise indicated.
---------------------------------------------------------------------------

    The final regulations 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 an 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 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 Final 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 163(h)(4) to the Code. 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.
    The final regulations provide definitions and clarifications of 
terms related to QPVLI in section 163(h)(4) and section 6050AA. The 
final regulations clarify that individuals, decedents' estates, and 
non-grantor trusts may deduct QPVLI. The final regulations 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 
final regulations adopt a standard for personal use that provides 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, 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 expects 
to own the APV. The 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 final regulations, the taxpayer is not 
required to reevaluate compliance with the personal use standard in 
taxable years after the indebtedness is incurred. The final regulations 
also 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 final regulations 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 
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 final regulations describe certain items and 
services that are considered customarily financed in an APV purchase 
transaction 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 that are directly related to the purchased APV is not an 
SPVL, 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 that is

[[Page 57229]]

not a credit insurance product 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.
    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 final regulations clarify that this limit applies regardless 
of the taxpayer's filing status for that taxable year. Additionally, 
under section 163(h)(4)(C)(ii)(I), 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)(ii)(II) 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 of the Code. The final 
regulations 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) of the Code.
    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 final regulations 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 generally commences with the first person that 
takes delivery of a vehicle after the vehicle is sold, registered, or 
titled. For purchasers that incur indebtedness to purchase a vehicle, 
original use does not commence with the taxpayer unless the loan 
documentation treats the vehicle as a new vehicle. The final 
regulations 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 final regulations clarify that for refinanced 
loans, the amount of the new loan on which interest may be 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 final regulations 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 vehicle loan 
interest. Any person who, in the course of a trade or business, 
receives from any individual more than $600 in a calendar year on an 
SPVL must provide an information return to the IRS and furnish a 
statement to the payor of record. The final regulations provide 
operational definitions and rules for complying with the information 
reporting requirements. The final 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 final regulations also 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.

II. Baseline

    The Treasury Department and the IRS have assessed the benefits and 
costs of the final regulations relative to a no-action baseline 
reflecting anticipated Federal income tax-related behavior in the 
absence of the final regulations.

III. Affected Entities and Taxpayers

    The final regulations affect individuals, decedents' estates, and 
non-grantor trusts that may deduct QPVLI, and also 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 final 
regulations, interest recipients receiving less than $600 of interest 
on an SPVL 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; \3\ roughly 60 
percent of new vehicle purchases are financed with loans; \4\ 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 
decedents' estates and non-grantor trusts that are obligors on vehicle 
loans.
---------------------------------------------------------------------------

    \3\ ``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.
    \4\ ``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      60 percent.
 with loans.
3. Of new vehicles sold, share with U.S.    60 percent.
 final assembly.

[[Page 57230]]

 
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 final 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 statute 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 Final Regulations

    The final regulations clarify the statute and facilitate taxpayers 
claiming the QPVLI 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 QPVLI, 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 expected 
personal use of the vehicle is sufficient to claim the deduction or 
whether a vehicle meets the standard for U.S.-final assembly.
    The final rules assist the taxpayer in understanding and claiming 
the QPVLI deduction. For example, the final 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 
loan interest to be eligible for the deduction. By facilitating 
taxpayers' understanding of which vehicles are American made and an APV 
under the statute, the final regulations reduce taxpayer compliance 
burden and, as a result, may also increase consumer demand for APVs and 
SPVLs, 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 final regulations.
a. Personal Use Standard
    Section 163(h)(4) limits the deduction to vehicles purchased for 
personal use. The final regulations 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(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

[[Page 57231]]

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.\5\ An alternative and narrower standard 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.
---------------------------------------------------------------------------

    \5\ 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.\6\
---------------------------------------------------------------------------

    \6\ 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 sole proprietors will not have an SPVL as a result of the 
purchase of used cars or foreign-assembled cars, nor as a result of the 
cash purchase or lease of any cars, 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.
    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.\7\ 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.
---------------------------------------------------------------------------

    \7\ 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 business  5 million.
 service in tax year 2023 *.
2. Of vehicles placed in business service in tax  80 percent.
 year 2023 (row 1), the share reported to be
 available for personal use.
3. Of vehicles placed in business service in      40 percent.
 2023 and available for personal use, the share
 reported with more than 50 percent of mileage
 for personal use.
4. Of vehicles placed in business service in      80 percent.
 2023 and available for personal use, the median
 share of miles driven for business use.
------------------------------------------------------------------------
* This total does not correspond to vehicles that are APVs; it includes
  used, leased, and foreign-assembled vehicles, which are not APVs. See
  the 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 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 vehicle loan interest 
qualifies for the deduction, and, therefore, face different tax 
liabilities. 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

[[Page 57232]]

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 for 
personal use. The final regulations ensure that these two taxpayers use 
the same standard of personal use and are subject to the same tax 
treatment.
    The 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; \8\ the salience of the tax deduction at the time of purchase; 
\9\ 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.
---------------------------------------------------------------------------

    \8\ 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 price 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>.
    \9\ 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 Expectation at Time Debt 
Is Incurred
    The final regulations provide that personal use is determined only 
once, based on taxpayers' expectation 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 final 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 final regulations, if a taxpayer meets the personal use 
standard (more than 50 percent of expected use of an APV for personal 
use), the vehicle loan may be considered an SPVL. 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 final 
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 final regulations promote 
flexibility by allowing taxpayers who meet the personal use standard 
and all other requirements to deduct vehicle loan 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 final regulations clarify what constitutes an SPVL. 
Specifically, the final rules provide that indebtedness qualifies as an 
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 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 an SPVL. The final 
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 an SPVL and therefore that 
only interest on that portion of the 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 guidance 
benefits taxpayers by removing uncertainty and reduces burden relating 
to what taxpayers may consider an SPVL. According to Autotrader, for 
financed vehicle purchases, ``taxes and dealer fees are almost always 
included in the payment.'' \10\ A substantial share of taxpayers with 
QPVLI would therefore benefit from the 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 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.
---------------------------------------------------------------------------

    \10\ ``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.

[[Page 57233]]

    The collection of information in these regulations contains 
reporting and recordkeeping requirements. The recordkeeping 
requirements mentioned in the final regulations are considered general 
tax records under Sec.  1.6001-1(e). These records are required for the 
IRS to validate that taxpayers have met the regulatory requirements and 
are entitled to the deduction for QPVLI under section 163(a) and (h)(4) 
and to verify the amount of the deduction claimed. For PRA purposes, 
general tax records are already approved by the OMB under 1545-0074 for 
individuals and 1545-0092 for trust and estate filers.
    The final regulations also mention reporting requirements related 
to claiming the deduction for QPVLI under section 163(a) and (h)(4). 
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 the OMB under 
1545-0074 for individuals and 1545-0092 for trust and estate filers.
    The final regulations also include reporting, third-party 
disclosure, and recordkeeping requirements required under section 
6050AA as set forth in Sec.  1.6050AA-1. These collections of 
information will be used by the IRS for tax compliance purposes and by 
taxpayers to help calculate their deduction. The burden associated with 
these information collections is included within the Form and 
Instructions for Form 1098-VLI. The Form 1098-VLI has been approved by 
the OMB, in accordance with 5 CFR 1320.10, under OMB control number 
1545-2334.
    No public comments were received by the IRS directed specifically 
at the PRA, but comments were received by the IRS on the proposed 
information collection and proposed reporting requirements and the 
burdens associated with the documentation requirements contained in the 
proposed regulations. As described in the relevant portions of this 
preamble, the Treasury Department and the IRS have determined that the 
documentation requirements are necessary to administer section 
163(h)(4) and related information reporting and penalty provisions.
    Many commenters requested that the Treasury Department and the IRS 
consider the time and cost for interest recipients to make adjustments 
to their systems to capture required data. The Treasury Department and 
the IRS acknowledge and appreciate that interest recipients may need to 
make adjustments to their systems and current processes to capture the 
required data. However, as a result of the interaction between sections 
6050AA and 163(h)(4), certain information such as determining whether a 
vehicle is an APV and whether the interest is received on an SPVL, is 
required by statute. See parts III.B.1 and III.B.5 of the Summary of 
Comments and Explanation of Revisions (Applicable Passenger Vehicle 
(APV) and Specified Passenger Vehicle Loan (SPVL), respectively) for a 
discussion of these requirements. The Treasury Department and the IRS 
have not changed the estimated burden of this reporting because 
commenters did not provide information relating to the additional costs 
associated with this reporting.
    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 of 
the Code.

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 604 of the RFA requires the agency to present a final 
regulatory flexibility analysis (FRFA) of the final regulations.
    The Treasury Department and the IRS have determined the final 
regulations will likely have a significant impact on a substantial 
number of small entities. Accordingly, an FRFA is provided in the final 
regulations.
A. Need for and Objectives of the Rule
    The final regulations provide the eligibility rules and key 
definitions regarding the QPVLI deduction, the deduction allowed by 
section 163(h)(4), to allow taxpayers to determine whether their 
interest is QPVLI. In addition, the final regulations 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 an SPVL.
    Congress intended the OBBBA provision regarding the QPVLI deduction 
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 final regulations 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 final regulations are consistent with 
the promotion of domestic manufacturing. The rules direct taxpayers to 
the NHTSA VIN lookup tool to help taxpayers and interest recipients 
determine whether a vehicle had undergone final assembly in the United 
States, a necessary condition for the vehicle to be an APV. Because the 
final regulations assist taxpayers 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 to be APVs. Thus, the 
Treasury Department and the IRS intend and expect that the final 
regulations will deliver benefits across the economy that will 
favorably impact individuals, vehicle dealers, and the domestic 
manufacturing industry, including vehicle manufacturers.
    Section 6050AA establishes information reporting requirements with 
respect to interest received on an SPVL. Information reporting under 
section 6050AA will provide taxpayers with information needed to claim 
the QPVLI deduction. The final regulations are expected to facilitate 
the preparation of tax returns and reduce the number of inadvertent 
errors by taxpayers who claim the deduction. The Treasury Department 
and the IRS also intend and expect that the final regulations will 
provide certainty to interest recipients required to comply with the 
statutory reporting requirements under section 6050AA.
B. Significant Issues Raised by Public Comments in Response to the 
Initial Regulatory Flexibility Analysis
    No public comments were received by Treasury and the IRS that 
directly addressed the initial regulatory flexibility analysis of the 
proposed regulations, but comments were received by the IRS on the 
general burdens associated with the proposed information collection, 
proposed reporting requirements, and documentation requirements 
contained in the proposed regulations. Some commenters referenced the 
entity size of specific interest recipients, including credit unions, 
and stated that these

[[Page 57234]]

interest recipients do not currently track all the information 
necessary to comply with the proposed regulations. As described in the 
relevant portions of this preamble, the Treasury Department and the IRS 
have determined that the requirements included in the final regulations 
are necessary to administer section 163(h)(4) and related information 
reporting and penalty provisions. The Treasury Department and the IRS 
also have determined that the statutory language does not authorize or 
support separate information reporting requirements for small entities.
C. Affected Small Entities
    The RFA directs agencies to provide a description of, and if 
feasible, an estimate of, the number of small entities that may be 
affected by the final regulation. 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 the final regulations does not depend on the size of 
the business, as defined by the Small Business Administration. Small 
Business Administration regulations provide small business size 
standards by NAICS Industry. See 13 CFR 121.201.
    As described more fully in this preamble to the final regulations 
and in this FRFA, 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 NAICS includes dealers of new vehicles and financial entities in 
NAICS codes for new car dealers (code 441110), motorcycle dealers (code 
441227), car loan lenders (code 522220), and consumer lending (code 
522291).
    Based on confidential tax return data, the Treasury Department and 
the IRS expect approximately 36,000 businesses to issue information 
returns under section 6050AA. See part I.III of this Special Analysis 
(Affected Entities and Taxpayers). This total does not include used car 
dealers because the statute and final regulations only apply to loans 
for new vehicles. Of the estimated 36,000 car and motorcycle loan 
lenders, the Treasury Department and the IRS expect 24,600 would likely 
be considered a small entity.
D. Impact of the Rules
    The final regulations will increase the recordkeeping and reporting 
requirements for businesses that provide loans for 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 part II 
of this Special Analyses (Paperwork Reduction Act). Based on the 
estimated number of responses (8,000,000) and the estimated time to 
respond of 0.25 hours, the estimated burden is 2,000,000 total annual 
burden hours.
E. Alternatives Considered for Small Businesses
    The Treasury Department and the IRS considered several alternatives 
to the final regulations that would have reduced the burden on small 
businesses. For example, the Treasury Department and the IRS considered 
a delay for reporting by 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, as discussed in part III.H of the Summary of Comments and 
Explanation of Revisions (Transition Relief), the Treasury Department 
and the IRS decided not to delay reporting under section 6050AA.
    Another alternative considered was whether interest recipients 
should not be required to furnish a written statement to the payor of 
record and be permitted instead to provide this information to the 
payor of record either on a monthly statement or via an online portal. 
However, as discussed in part III.G of the Summary of Comments and 
Explanation of Revisions (Requirement to Furnish a Written Statement), 
the requirement to furnish a statement to the payor of record is 
expressly required by sections 6050AA(c) and 6724(d)(2)(MM).

IV. Section 7805(f)

    Pursuant to section 7805(f), the proposed regulations (REG-113515-
25) preceding this final regulation were submitted to the Chief Counsel 
for the Office of Advocacy of the Small Business Administration for 
comment on its impact on small business, and no comments were received.

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 (updated annually for inflation). The final 
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 (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. The final regulations do not have 
federalism implications and do not impose substantial direct compliance 
costs on State and local governments or preempt State law within the 
meaning of the Executive order.

VII. Congressional Review Act

    Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), 
the Office of Information and Regulatory Affairs designated this rule 
as a major rule, as defined by 5 U.S.C. 804(2).

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 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.

Amendments to the Regulations

    Accordingly, the Treasury Department and IRS amend 26 CFR parts 1 
and 301 as follows:

[[Page 57235]]

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), section 163(h)(4) excludes qualified 
passenger vehicle loan interest (QPVLI), 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 the 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) Items or amounts customarily financed in an APV purchase 
transaction that are directly related to the purchase of the APV. The 
term items or amounts customarily financed in an APV purchase 
transaction that are directly related to the purchase of the APV means 
any item or amount that is customarily financed in an APV purchase 
transaction, and that is directly related to the purchase of the APV, 
as determined on an industry-wide basis and not by reference to the 
financing terms of a particular financing entity.
    (7) 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.
    (8) 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.
    (9) 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.
    (10) Non-grantor trust. The term non-grantor trust means a trust 
(or the portion of a trust) that is not a grantor trust.
    (11) 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.
    (12) 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.
    (13) 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.
    (14) Qualified vehicle type--(i) In general. The term qualified 
vehicle type means one of the following vehicle types:
    (ii) Car. The term car means a vehicle classified in one of the 
classes of passenger automobiles listed in 40 CFR 600.315-08(a)(1).
    (iii) Minivan. The term minivan means a minivan as defined under 40 
CFR 600.002.
    (iv) Van. The term van means a van as defined under 40 CFR 600.002.
    (v) Sport utility vehicle. The term sport utility vehicle means a 
sport utility vehicle as defined under 40 CFR 600.002.
    (vi) Pickup truck. The term pickup truck means a pickup truck as 
defined under 40 CFR 600.002.
    (vii) Motorcycle. The term motorcycle means a motorcycle as defined 
under 49 CFR 571.3(b).
    (15) 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 that is the first voluntary security interest 
recorded against the vehicle, regardless of subsequent involuntary 
liens such as tax liens or other similar security interests that may be 
given temporary higher priority at a later date following the date of 
purchase. An APV may be considered to be secured by a first lien as 
long as there is a lending agreement evidencing a security interest 
under State or other applicable law, even if that lien has not yet been 
perfected or recorded due to processing times or other similar delays 
arising under State or other applicable law. An APV may also be treated 
as secured by a first lien in limited circumstances in which a lien is 
removed in connection with the taxpayer no longer owning the vehicle 
but the taxpayer continues to be liable for a specified passenger 
vehicle loan (SPVL), such as a repossession of the

[[Page 57236]]

vehicle or insurance payout following a total loss claim.
    (16) 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.
    (17) Vehicle identification number (VIN). The term vehicle 
identification number or VIN means a series of Arabic 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), 
including prepaid interest in the form of points and deferred or 
capitalized interest. QPVLI includes origination-related or financing-
related charges, prepayment penalties, late payment charges, default-
related charges, and similar fees, in each case if such charge, 
penalty, or fee is characterized as interest expense for Federal income 
tax purposes and included in the amount reported as interest received 
for the calendar year in the statement furnished by the interest 
recipient under section 6050AA(c) of the Code and Sec.  1.6050AA-1(h).
    (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. However, for 
purposes of this paragraph (c)(2), the amount of interest for a 
calendar year is determined consistently with Sec.  1.6050AA-1(f)(2) 
(special rule for interest accrued by January 15). 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 on the APV 
financed by the SPVL at the time the interest is paid or accrued. For 
example, the purchase of an APV with a credit card would generally not 
result in an SPVL secured by a first lien on an APV, because such 
indebtedness generally is not secured by the APV.
    (ii) Exception for a substitute vehicle due to an 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 paragraphs 
(c)(5) and (d)(4) 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 as QPVLI under section 163(a) 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)(12) 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

[[Page 57237]]

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 that are directly related to the purchase of the APV. Items 
or amounts customarily financed in an APV purchase transaction that are 
directly related to the purchase of the APV include, but are not 
limited to, vehicle service or repair plans (for example, mechanical 
repair coverage), vehicle protection products (including tire, wheel, 
paint, and interior protection products), key fob replacement plans, 
warranties or extended warranties, guaranteed asset protection (GAP) 
waiver or insurance that covers the difference between an APV's value 
and the outstanding balance of the indebtedness in the event of a total 
loss, credit insurance products (including credit-related accident, 
health, and life products), sales taxes, vehicle-related fees 
(including title and registration fees), and vehicle-related 
accessories that are components of the APV purchased as part of the APV 
transaction.
    (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 purchase of the 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 repayment of negative equity on a loan 
secured by a trade-in vehicle, to purchase collision and liability 
insurance that is not a credit insurance product, 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 purchase of the 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 that are directly related to the purchase 
of the APV in an APV purchase transaction 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 a 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 APV purchase transaction) 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 or amounts customarily 
financed in an APV purchase transaction that are directly related 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 a change 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 after December 31, 2024, 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

[[Page 57238]]

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 that are directly related to 
the purchase of the APV. 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. 
A does not make a down payment.
    (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 that are directly related to the purchase of the 
APV and therefore this indebtedness is not 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 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 a 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 
directly relates to the purchase of the APV. See 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 $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.
    (v) Example 5: Method of allocating interest--(A) Facts. A finances 
the purchase of an APV for personal use by incurring a loan of $40,000, 
of which $36,000 was for amounts described in paragraph (d)(2)(i) of 
this section and of which $4,000 was for amounts described in paragraph 
(d)(2)(ii) of this section. A did not make a down payment.
    (B) Analysis. Under paragraph (d)(2)(iii) of this section, the loan 
must be allocated between indebtedness that is an SPVL and indebtedness 
that is not an SPVL. The percentage of the loan that is described in 
paragraph (d)(2)(i) of this section and is an SPVL is 90 percent 
($36,000/$40,000) and the percentage of the loan that is described in 
paragraph (d)(2)(ii) of this section and is not an SPVL is 10 percent 
($4,000/$40,000). As a result, only 90 percent of each interest payment 
on the loan may be QPVLI. The remaining 10 percent of each interest 
payment on the loan is not QPVLI.
    (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) 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 a qualified vehicle type;
    (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 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 (taking into account paragraphs (e)(2)(ii) and 
(iii) of this section). In the case of a purchaser that incurs 
indebtedness for the vehicle purchase, original use of the vehicle does 
not commence with that purchaser unless the loan documentation treats 
the vehicle as a new vehicle.
    (ii) Dealers. Original use of a vehicle held by a dealer does not 
commence with the dealer if the vehicle is held primarily for sale to 
customers in the ordinary course of its trade or business, and as a 
result the dealer is not considered to be the first person that takes 
delivery of the vehicle after it is sold, registered, or titled as 
described in paragraph (e)(2)(i) of this section. However, original use 
of a vehicle may commence with a dealer if the vehicle is held by the 
dealer for any purpose other than primarily for sale to customers in 
the ordinary course of its trade or business.
    (iii) Original use for joint purchasers. If more than one person 
purchases a vehicle and one of these purchasers is the first person 
that takes delivery of the vehicle after the vehicle is sold, 
registered, or titled, then each of these purchasers is considered to 
be the first person that takes delivery of the vehicle after the 
vehicle is sold, registered, or

[[Page 57239]]

titled as described in paragraph (e)(2)(i) of this section.
    (iv) 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.
    (v) Examples. The rules of this paragraph (e) are illustrated by 
the following examples:
    (A) Example 1: Demonstrator vehicles--(1) Facts. Dealer purchases 
and takes delivery of a vehicle from the manufacturer. Dealer has 
always held the vehicle primarily for sale to customers in the ordinary 
course of Dealer's trade or business and also uses the vehicle as a 
demonstrator vehicle. Dealer titles and registers the vehicle in its 
name prior to use as a demonstrator vehicle in accordance with State 
law requirements.
    (2) Analysis. Original use of the vehicle does not commence with 
Dealer. Although Dealer titled and registered the vehicle as required 
by State law, the vehicle was always held by Dealer primarily for sale 
to customers in the ordinary course of Dealer's trade or business. 
Accordingly, Dealer is not considered to be the first person that takes 
delivery of the vehicle after the vehicle is sold, registered, or 
titled. Original use of the vehicle may commence with a subsequent 
purchaser of the vehicle.
    (B) Example 2: Cancelled sale--(1) Facts. A enters into a contract 
to purchase a special-order vehicle from Dealer that is estimated to be 
delivered in one month. When Dealer purchases the vehicle from the 
manufacturer, Dealer holds the vehicle primarily for sale to customers 
in the ordinary course of Dealer's trade or business. A cancels the 
order under the sales contract prior to the delivery occurring.
    (2) Analysis. Original use of the vehicle does not commence with 
Dealer. The vehicle was always held by Dealer primarily for sale to 
customers in the ordinary course of Dealer's trade or business. Thus, 
Dealer is not considered to be the first person that takes delivery of 
the vehicle after the vehicle is sold, registered, or titled. Original 
use of the vehicle does not commence with A because A cancelled the 
order. 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.
    (C) Example 3: Vehicle purchase following a lease--(1) Facts. 
Dealer is engaged in the business of purchasing vehicles to sell to 
vehicle leasing companies. Dealer only holds these vehicles primarily 
for sale to customers in the ordinary course of Dealer's trade or 
business. Dealer sells a vehicle purchased from the manufacturer to 
Leasing Company. Leasing Company is not a dealer. Leasing Company takes 
delivery of the vehicle after titling and registering the vehicle in 
its name. Leasing Company immediately leases the vehicle to A. At the 
end of the lease term, A exercises its option under the lease agreement 
to purchase the vehicle.
    (2) Analysis. Original use of the vehicle does not commence with 
Dealer. The vehicle was always held by Dealer primarily for sale to 
customers in the ordinary course of Dealer's trade or business. Thus, 
Dealer is not considered to be the first person that takes delivery of 
the vehicle after the vehicle is sold, registered, or titled. Original 
use of the vehicle commences with Leasing Company. Leasing Company is 
the first person that takes delivery of the vehicle after the vehicle 
is sold, registered, or titled. Accordingly, the original use of the 
vehicle does not commence with A as A is not the first person that 
takes delivery of the vehicle after the vehicle is sold, registered, or 
titled.
    (D) Example 4: Returned vehicle--(1) Facts. A, who is not a dealer, 
purchases a vehicle from Dealer. Dealer purchased the vehicle from the 
manufacturer and has always held the vehicle primarily for sale to 
customers in the ordinary course of Dealer's trade or business. 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 
Dealer. The vehicle was always held by Dealer for sale to customers in 
the ordinary course of Dealer's trade or business. Thus, Dealer is not 
considered to be the first person that takes delivery of the vehicle 
after the vehicle is sold, registered, or titled. Original use of the 
vehicle does not commence with A. A is not considered to be the first 
person that takes delivery of the vehicle after it is sold, registered, 
or titled as A returned the vehicle to Dealer within 30 days of taking 
delivery of the vehicle. Original use of the vehicle may commence with 
a subsequent purchaser of 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 determination of whether the taxpayer purchased the 
APV for personal use is 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 
expectation that A will use the APV to earn income as a driver for a 
rideshare service for 15 percent 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

[[Page 57240]]

proprietorship for 60 percent of the time. A expects to use the APV for 
A's personal use for the remaining 40 percent of the time.
    (B) Analysis. A is not considered to have purchased the APV for 
personal use. At the time A purchases the 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 the 
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 paragra

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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.