At a Glance
The IRS has released Notice 2025-57 and Information Release 2025-105, offering transitional guidance for the new auto loan interest deduction created under the One Big Beautiful Bill Act (OBBBA). This article explains how the deduction works, which vehicles and taxpayers qualify, and what lenders must do to comply. Learn about reporting requirements, system updates, and opportunities to support borrowers under this new tax benefit effective for 2025–2028.
Contents
- Background on the OBBBA
- IRS Guidance Highlights (Notice 2025-57)
- Considerations for Lenders
- Implications for Taxpayers
- The Road Ahead
The One Big Beautiful Bill Act (OBBBA) introduced a wide range of tax reforms aimed at supporting middle-class taxpayers and stimulating domestic manufacturing. Among its most discussed provisions is a new federal deduction for auto loan interest, available to individuals who purchase qualifying new vehicles.
To help lenders and taxpayers navigate this change, the IRS recently issued Notice 2025-57, providing transitional guidance on reporting obligations and implementation details. This notice, paired with Information Release 2025-105, outlines how lenders can meet their new reporting responsibilities for 2025 and how borrowers can prepare to claim the deduction. The transitional relief is especially important for credit unions and auto lenders updating their systems and communication processes prior to providing required information.
Background on the OBBBA
The OBBBA, signed into law on July 4, 2025, modernized several sections of the Internal Revenue Code. Among its key provisions is the allowance for taxpayers to deduct interest paid on qualified new car loans—a benefit not previously available for personal vehicle purchases.
To qualify, the deduction applies to:
- New vehicles purchased between 2025 and 2028.
- Vehicles assembled in the United States.
- Personal use vehicles only—business or commercial use does not qualify.
- Loans secured by the vehicle itself.
If the taxpayer qualifies:
- The deduction is capped at $10,000 per year in loan interest.
- Income-based phaseouts limit eligibility for higher-income taxpayers.
These parameters are designed to focus the deduction on new, U.S.-assembled vehicles and to target relief toward middle-income consumers.
IRS Guidance Highlights (Notice 2025-57)
The IRS’s guidance clarifies how lenders and borrowers can comply with the new reporting requirements and how the deduction will be claimed for 2025 and beyond. The following highlights from Notice 2025-57 summarize what institutions and taxpayers need to know:
- Transitional Relief: Recognizing the time needed to update technology systems, the IRS is offering penalty relief for calendar year 2025. Lenders who provide borrower statements indicating the interest received during 2025 by January 31, 2026, will be considered compliant. Penalties under Sections 6721 and 6722 will not apply during this transition year.
- Borrower Access: Lenders may fulfill these requirements by providing interest totals through online portals, monthly statements, or annual summaries.
This temporary relief gives financial institutions critical breathing room as they adapt systems and procedures to meet new federal reporting standards.
For years after 2025, the information needed is as follows:
- New Reporting Form: Taxpayers will claim the deduction using Schedule 1-A, a new attachment to Form 1040 beginning in 2026.
- Lender Reporting: Under new Section 6050AA, any lender receiving $600 or more in interest payments from an individual in a calendar year must:
- File an information return with the IRS;
- Provide borrowers with annual statements showing total interest paid; and
- Include identifying details for the borrower, vehicle, and loan.
Considerations for Lenders
Credit unions and other auto lenders will play a central role in ensuring compliance and providing accurate information to borrowers. To prepare, institutions should focus on several key operational areas:
- System Updates: Many institutions use legacy loan servicing platforms that may not yet support the data fields or output formats required under Section 6050AA. Early system reviews will help determine whether upgrades or manual reporting solutions are needed.
- Member Communication: Lenders should begin preparing clear, proactive messaging to explain the deduction, eligibility rules, and required documentation. Borrowers will look to lenders for guidance on obtaining accurate interest totals.
- Administrative Burden: Even with transitional relief, additional recordkeeping and reporting will add complexity. Institutions should plan for additional work to ensure they are meeting their requirements.
Taking early steps to modernize systems and establish communication plans will help minimize disruptions and position lenders as trusted partners during implementation.
Implications for Taxpayers
For consumers, this new provision provides meaningful relief on new car financing costs—but only if they meet the eligibility rules and keep the right records. Borrowers should take the following steps to ensure they can take full advantage of the deduction:
- Confirm their vehicle’s assembly location and purchase date.
- Ensure the vehicle is used for personal use only
- Retain loan documentation and lender-provided statements.
- Complete Schedule 1-A when filing 2025 tax returns to claim the deduction.
Taxpayers who stay organized and review the IRS’s evolving guidance will be best positioned to benefit from this temporary but valuable tax incentive.
The Road Ahead
The OBBBA’s new auto loan interest deduction represents a significant shift in personal tax policy—and a major reporting change for lenders. Financial institutions and auto finance companies should begin preparations now to update systems, educate members and customers, and integrate the IRS’s transitional procedures for 2025.
Taxpayers and businesses alike are encouraged to consult with accountants and tax professionals to ensure compliance and maximize the benefits of this new incentive. Future IRS updates are expected as the agency finalizes reporting forms and full implementation rules.
Erika Gagne is a Senior Manager at ARB who provides audit, accounting, and advisory services across diverse industries, including auto dealerships, commercial entities, financial institutions, and nonprofit organizations. With a background in financial management and compliance, Erika plays a pivotal role in client relations, creating tailored solutions that meet clients’ unique needs and regulatory requirements.
