Auto Loan Interest Deduction Proposed Rules

Happy New Year everyone. I hope you all had a relaxing holiday, because the IRS did not. On December 31, 2025, the IRS issued proposed rules on the vehicle loan interest deduction and its reporting requirements. The rule helps clarify the reporting requirements for credit unions, including whether credit unions are required to determine if a loan qualifies for the deduction. This blog will go over some key points of the proposed rule. For more information, members can review our updated FAQs that discuss the proposed rule in more detail. America's Credit Unions will also issue a Regulatory Comment on the proposed rule and plans to submit comments to the IRS as they work to finalize their rule.

What are a credit union's obligations under the proposed rule?

Under the proposed rule, an "interest recipient" who receives at least $600 of interest on a Specified Passenger Vehicle Loan (SPVL) is required to file an information return with the IRS and furnish a statement to the payor of record.

The proposed rule provides the following definition of SPVL: "Indebtedness is an SPVL only if the indebtedness is incurred by the taxpayer after December 31, 2024, for the purchase of an [applicable passenger vehicle] for personal use and is secured by a first lien on that APV."

Based on this definition, in order to determine whether a loan is an SPVL, a credit union must determine whether a vehicle is an Applicable Passenger Vehicle (APV) for personal use and must obtain a first lien on the APV.

What debt can be included in a Specified Passenger Loan Vehicle?

Under the proposed rules, indebtedness qualifies as an SPVL if the indebtedness is incurred for the purchase of an APV or the indebtedness is for items and amounts customarily financed in an APV purchase transactions and that are directly related to the purchased APV. The preamble provides the following examples:

• Service plans
• Extended warranties
• Sales tax and vehicle related fees

The preamble also provides examples of what is not included:

• Collision and liability insurance
• Purchase property other than the APV, such as a boat
• Indebtedness to pay off amounts due on another vehicle or loan

One key unknown here is GAP insurance. Although GAP insurance is customarily financed in an auto loan, the preamble specifically states that collision and liability insurance is not included as eligible indebtedness. Since GAP insurance is typically used to cover the gap in the note owed and the market value of the car following events such as collisions, it remains unclear whether interest earned on any financed GAP amounts would be deductible.

What is an Applicable Passenger Vehicle?

Under the proposed rule, in order to be considered an APV a vehicle must meet the following requirements:

• The original use commences with the taxpayer
• The vehicle is manufactured primarily for use on public streets
• The vehicle has at least 2 wheels
• The vehicle is in a qualified vehicle classification
• The vehicle is treated as a motor vehicle under title II of the Clean Air Act
• The vehicle's gross vehicle weight rating is less than 14,000 ponds
• The final assembly of the vehicle occurs within the United States

When is a credit union required to submit an information return and written statement?

Under the proposed rule, an interest recipient is generally required to file an information return on or before February 28th for physical filings and on or before March 31st for electronic filings. An interest recipient is also required to furnish the payor of record with a written statement on or before January 31st.

One key thing credit unions should note is that the proposed rule requires information returns to be filed with the IRS and that this requirement applies to calendar years beginning after December 31, 2024. This may only be a proposed rule, but if the final rule is published within 18 months of the passage of H.R. 1 (aka the One Big Beautiful Bill act), the final rule can be retroactively effective to the passage date of H.R. 1.

That being said, prior to the issuance of the proposed rule, the IRS issued Notice 2025-57 which provided transitional guidance on the information reporting requirements for interest recipients. Notice 2025-57 provides that an interest recipient will be deemed to have satisfied the reporting obligations under section 6050AA for interest on SPVLs received in 2025 if the interest recipient makes a statement available to the individual indicating the total amount of interest received in calendar year 2025 on an SPVL. The IRS also released draft Form 1098-VLI which is labeled as a 2026 draft form.

Based on this transitional guidance and draft Form 1098-VLI, it appears that no penalties will be assessed for not filing an information return with the IRS for tax year 2025. However, neither the proposed rule nor the preamble discuss the effect of the proposed rule or potential retroactive effectiveness of a final rule on the transitional guidance. The preamble merely acknowledges that transitional guidance was issued.

Credit unions may wish to consult with a tax professional to make a risk-based decision regarding filing information returns for tax year 2025. America's Credit Unions will be attending a public hearing on the proposed rule on February 24th to obtain more guidance from the IRS. For more information on the transitional guidance, members can view this webinar on the auto loan interest deduction and remittance transfer tax with tax policy expert David Ransom, Shareholder with Brownstein Hyatt Farber Schreck, LLP.