The principal paid on a car loan is not tax deductible. Occasionally, the interest paid is.
Making The Interest Deductible
Some financial experts will recommend that you find a way to make the INTEREST paid on a car loan deductible, but even that avenue is very limited. In order to deduct the interest paid on a car loan, you have to claim the vehicle as a business expense. That means that the vehicle will have to be used exclusively for business purposes. Additionally, your business must have a federal Employer Identification Number (EIN) to qualify for the interest deduction. Even then, claiming interest paid on a car loan as a tax deduction is a red flag to the IRS and may cause you to be audited.
Beware of Audits
In the event that you are audited, and have been a little loose with your interpretation of the tax code, you will have to pay. You will owe the full tax bill, penalties that could add several thousand dollars to your bill, and interest on all of that money. Let’s not forget the chance of being jailed for income tax evasion. In the end, it is not worth even trying to claim any part of a car loan as a tax deduction.