Blog · 16 October 2026

Form 1098-VLI and the Car Loan Interest Deduction: Payer of Record, Box 1 Gaps and Schedule 1-A Checks for US CPA Firms

By Keshav Bansal, CA

The first Form 1098-VLI statements for calendar year 2026 are due to clients by January 31, 2027, and many will not match what clients think they paid. The IRS posted final Instructions for Form 1098-VLI (Rev. December 2026) on October 1, as Candid Yak’s Hank Mercer noted on October 3, 2026. The Vehicle Loan Interest Statement is the information return behind the car loan interest deduction under IRC §163(h)(4), which clients claim on Schedule 1-A. For US CPA firms, the work is reconciliation: who got the form, why Box 1 is low, and what to do when no form arrives.

What Form 1098-VLI is, and what it is not

Under §6050AA, anyone who, in a trade or business, receives $600 or more of interest in a calendar year on a specified passenger vehicle loan (SPVL) must file a return with the IRS and furnish a written statement to the individual on or before January 31 of the following year. Per the IRS instructions, the $600 threshold applies separately to each SPVL. A lender is not required to file for a loan with less than $600 of interest, even if the same individual paid more than $600 in total across several loans. Dealers that finance under a first lien are covered too.

The form supports the deduction but does not define it. Section 163(h)(4) sets the rules: interest on debt incurred after December 31, 2024 to buy an applicable passenger vehicle for personal use, secured by a first lien; original use beginning with the taxpayer; final assembly in the United States; a $10,000 annual cap; and a reduction of $200 for each $1,000 (or portion) of modified AGI above $100,000 ($200,000 joint), for taxable years 2025 through 2028. The statute also requires the VIN on the return. It does not require a Form 1098-VLI. For how Part IV sits beside the other new deductions, see our senior deduction and Schedule 1-A guide.

Payer of record: one form, one name

The instructions send the statement only to the payer of record, meaning the person the lender carries on its books as the principal borrower. If the lender’s records do not say who that is, the lender must designate one. Even when a loan has several borrowers, the lender prepares Form 1098-VLI only for the payer of record, and the form shows the total interest received on the loan. Payments by third parties are reported as if the payer of record made them. The IRS example is a parent making payments on a borrower’s loan.

Treasury’s final regulations (TD 10054, Federal Register September 8, 2026, effective November 9, 2026) require the statement to carry a legend: the payer of record may deduct qualified interest only to the extent the loan was incurred by, and the interest was actually paid by, the payer of record. So Box 1 does not automatically equal the named borrower’s deduction. When unmarried co-borrowers file separately, or a parent pays, get bank records showing who actually paid, and do not let two returns claim the same dollars.

Why Box 1 can be lower than “interest paid”

Box 1 reports only interest on the part of the debt that is an SPVL. The instructions include customarily financed, directly related items such as service contracts, GAP, credit insurance products, sales tax and title fees. They exclude debt used to pay off negative equity on a trade-in, collision and liability insurance that is not a credit insurance product, unrelated items such as a trailer or boat, and any cash proceeds from the lender. For a refinance, the qualifying amount is capped at the old loan’s outstanding balance at the refinancing date, and principal and interest are allocated pro rata. If a different person becomes the obligor, the loan stops being an SPVL unless the change results from the obligor’s death.

Timing can also move the number. Prepaid interest is reported only in the year it properly accrues, with a narrow exception for interest that fully accrues by January 15 of the next year. Refunds of prior-year overpaid interest go in Box 5 in the year the refund is made, and the earlier form is not changed. When Box 1 and the December statement differ, ask the lender for its allocation.

Boxes 2d, 6 and 7: the eligibility flags

Box 2d carries the VIN. Box 6 is checked if original use began with the payer of record, and Box 7 if final assembly occurred in the United States. Lenders may rely on the plant of manufacture shown in the VIN (checked with the NHTSA VIN decoder) or on the vehicle’s label. As Mercer notes, the deduction needs both, so a blank Box 6 or 7 on a new, U.S.-built car is a reason to request a corrected form, not to drop the deduction.

No form, late-year purchases and 2025 statements

In Mercer’s example, a $35,000 car bought in October at 7% may produce only two payments before New Year’s, which puts interest under $600, so no form is required. Lenders also file only if the loan was secured by a first lien when it was made. For calendar year 2025, IRS Notice 2025-57 let lenders meet the requirement by making a statement of total 2025 interest available to the individual, so expect portal printouts for those returns.

Either way, the deduction turns on the statute, not the paperwork. Get the loan contract, the year-end interest statement and the VIN. Note the client’s expected personal use at purchase: the final regulations require an expectation of more than 50% personal use over the expected ownership period. If the vehicle also has business use, coordinate with mileage records and the 2026 standard mileage rates.

Preparer checklist

• Collect the form or its substitute. Form 1098-VLI for 2026; for 2025, the lender’s Notice 2025-57 statement.
• Confirm who paid. Payer of record vs co-borrowers vs third-party payers; keep bank evidence.
• Reconcile Box 1. Ask for the lender’s allocation when negative equity, cash-out, unrelated add-ons or a refinance are involved.
• Check Boxes 6 and 7 against the VIN. Request a corrected form if they look wrong.
• Apply the limits. $10,000 per return regardless of filing status (the final regs let interest from several qualifying loans be added together before the cap), then the MAGI reduction. Head-of-household filers use the $100,000 threshold.
• Enter the VIN on Schedule 1-A and keep the loan file.
• Update withholding conversations. See our draft 2027 Form W-4 guide for clients with new car loans.

Where Tax Brew fits

Reconciling 1098-VLI statements against loan files takes January hours. Tax Brew provides bookkeeping, cleanup and tax prep support for US CPA firms, with the first 20 hours free for qualifying engagements, while your team keeps the review, advice and sign-off. See our services, or email info@taxbrewglobal.com.

Sources: IRS — Instructions for Form 1098-VLI (Rev. December 2026); Hank Mercer, Candid Yak — Form 1098-VLI (updated Oct. 3, 2026); 26 U.S.C. §6050AA and §163(h)(4) (Cornell LII); TD 10054, Car Loan Interest Deduction (Federal Register, Sept. 8, 2026); IRS FS-2026-04 (Schedule 1-A); IRS Topic no. 505; Notice 2025-57. General information, not tax or legal advice.