Freelancers: Brake for the New Car Loan Tax Deduction Under the One Big Beautiful Bill

The recently enacted One Big Beautiful Bill (OBBB) has introduced a wave of tax reforms many of which may benefit freelancers. Among the most impactful changes? A new provision that allows freelancers and gig economy workers to deduct car loan interest when their vehicle is used for business purposes. This marks a significant shift in how self-employed individuals can manage and reduce their taxable income, especially those who rely heavily on their vehicles to earn a living.

A few important points in regard to the type of vehicle and loan that qualifies: 

• This deduction is available for new car loans originated after December 31, 2024, used to purchase a qualified vehicle for personal use.
• Lease payments do not qualify.
• Refinanced loans generally qualify for the deduction, up to the amount owed at the time of refinancing.

If your vehicle purchase complies with the points above, the deduction may offer a significant reduction in your tax obligations because it is considered "above-the-line," meaning you can claim it even if you take the standard deduction instead of itemizing. 

The Impact of the New Car Loan Interest Deduction on Freelance Taxes

Before this bill, freelancers had limited options when it came to deducting vehicle-related expenses. The IRS allowed deductions for mileage or actual vehicle expenses, such as fuel, maintenance, and depreciation. However, car loan interest was typically excluded unless the vehicle was used exclusively for business purposes—a rare scenario for most freelancers who also use their cars for personal errands.

The One Big Beautiful Bill changes that. Now, freelancers can deduct a proportional amount of interest paid on their car loans based on how much they use the vehicle for business. This means that even if a car is used for both personal and professional activities, the business-use portion of the interest is still deductible.

For example, if a freelance photographer drives 20,000 miles in a year, and 14,000 of those miles are for client photoshoots, location scouting and equipment transport, this will equate to 70% business use. Under the new law, this freelancer can deduct 70% of the interest paid on their car loan for that year.

This provision applies to both new and existing loans, as long as the vehicle is used for business purposes during the current tax year. It is also retroactive, meaning freelancers who took out loans earlier in the year can still benefit when they file their taxes.

The New Car Loan Interest Deduction May Boost Your Freelance Business Bottom Line

For many freelancers, a vehicle is not just a convenience—it is a necessity. Whether you are a rideshare driver, mobile dog groomer, or independent contractor traveling between job sites, your car is often central to your income. By allowing car loan interest deductions, the OBBB acknowledges the actual costs of self-employment and offers a tangible way to reduce tax liability.

This change could result in substantial savings. For example, if a freelancer pays $3,000 in interest annually and uses 70% of their car for business, they could deduct $2,100 from their taxable income. Depending on their tax bracket, this could translate into hundreds of dollars in actual tax savings.

Be Aware of Income Limit Thresholds on Car Loan Interest Deductions

The car loan interest deduction introduced by the One Big Beautiful Bill Act (OBBBA) for tax years 2025 through 2028 is subject to income limitations based on Modified Adjusted Gross Income (MAGI). 

Here is a summary of the income limits:

• Full Deduction: The maximum deduction of $10,000 is fully available for:
  • Single filers with a MAGI of $100,000 or less.
  • Married couples filing jointly with a MAGI of $200,000 or less.
• Reduced Deduction (Phase-out): The deduction begins to phase out for taxpayers with MAGIs above these thresholds. The deduction is reduced by $200 for every $1,000 over the limit.
• No Deduction: The deduction is completely phased out for:
  • Single filers earning above $150,000.
  • Married couples filing jointly with incomes above $250,000. 

How Freelancers Can Leverage the OBBB Car Loan Interest Deduction

To take full advantage of this new deduction, freelancers should start by tracking their mileage and record dates, destinations, and the purpose of each trip. Creating this type of detailed log—whether kept manually or through an app—can help determine the percentage of business use. 

It is also important to retain loan documents and interest statements, as these will be needed when filing taxes. In addition, be sure to consult a tax professional, especially if you are unsure how to allocate mixed-use expenses.