The final regulations answer several of the questions left open by the proposed rules. They also confirm that Form 1098-VLI reporting is much more than pulling an annual interest amount from a loan servicing system.
Bottom line
For 2026 reporting, lenders must identify qualifying loans and vehicles, separate qualifying from nonqualifying financed amounts, allocate principal and interest when necessary, capture the amounts that qualify as interest for federal tax purposes, and preserve the data needed to support reporting throughout the life of the loan. The substantive regulations are now final, but the IRS has not yet released a final Form 1098-VLI or final instructions.
Treasury and the IRS have finalized the regulations implementing the new car loan interest deduction, giving auto finance lenders much-needed clarity on how qualified passenger vehicle loan interest must be determined and reported.
The final regulations, TD 10054, were published September 8, 2026. They address several important questions left open by the proposed regulations, including what counts as interest, how to handle loans that contain both qualifying and nonqualifying amounts, and the treatment of negative equity. They also make clear that lenders are responsible for determining whether a loan qualifies for reporting under section 6050AA.
One important piece is still outstanding. The IRS posted revised draft Form 1098-VLI and draft instructions immediately before the final regulations were published. Those materials remain drafts. As of September 9, the IRS has not released the final Form 1098-VLI or final instructions for 2026 reporting.
Form 1098-VLI: 5 Critical Requirements for Lenders
1. Only qualifying vehicle loan interest is reportable
This sounds straightforward until you look at what can actually be financed in an auto loan.
A Specified Passenger Vehicle Loan, or SPVL, includes indebtedness incurred to purchase a qualifying vehicle, along with other amounts customarily financed in a vehicle purchase transaction that directly relate to that vehicle. The final regulations include examples such as service plans, extended warranties, sales taxes, vehicle-related fees, and certain vehicle protection and credit-related products.
But not everything rolled into the loan qualifies. Most notably, negative equity from a trade-in is not SPVL indebtedness. Treasury concluded that negative equity relates to the prior vehicle purchase, not the purchase of the new qualifying vehicle. Cash proceeds received by the borrower and amounts financing unrelated property or services are also excluded.
That distinction matters because the reporting obligation follows the qualifying portion of the loan, not necessarily the total contractual loan balance. The draft Form 1098-VLI instructions reinforce this by directing lenders to report only the interest attributable to the SPVL.
Regulatory reference: Treas. Reg. §1.163-16(d)(2)(i)-(iii); draft Instructions for Form 1098-VLI, Box 1.
2. Mixed loans require lenders to allocate interest
If a loan contains both qualifying and nonqualifying indebtedness, Treasury requires the lender to separate the two.
The final regulations require principal and interest to be allocated pro rata between the SPVL and non-SPVL portions of the loan. Treasury considered requests for other allocation methods and declined to provide them. The pro rata method is required.
For example, if $45,000 of a $50,000 loan qualifies as SPVL indebtedness, 90 percent of the loan is qualifying. If the borrower pays $4,000 of interest, $3,600 is attributable to the SPVL portion.
This is one of the most important operational requirements in the final regulations. A lender cannot necessarily take the annual interest amount from its servicing system and place it on Form 1098-VLI. It needs to know what was financed, which components qualify, and what portion of the loan is SPVL indebtedness so the appropriate amount of interest can be reported.
Regulatory reference: Treas. Reg. §1.163-16(d)(2)(iii), including the mandatory pro rata allocation rule.
3. “Interest” means more than stated periodic interest
This was one of the significant unanswered questions in the proposed regulations.
Other IRS interest regimes have long recognized that interest for federal tax purposes can include more than the periodic interest charged on a loan. In comments on the proposed regulations, Sovos asked Treasury to provide similar clarity for vehicle loan interest, pointing to the existing student loan rules under §1.221-1(f) and mortgage interest rules under §1.6050H-1.
Treasury addressed the issue in the final regulations and specifically referenced those existing authorities in explaining the change.
The final rules now provide that QPVLI includes prepaid interest in the form of points and deferred or capitalized interest. Origination-related and financing-related charges, prepayment penalties, late-payment charges, default-related charges, and similar fees can also be included when they are characterized as interest expense for federal income tax purposes and included in the interest reported under section 6050AA.
For lenders, the question becomes much more practical: Does the system producing the annual interest amount capture all of the amounts that must be characterized as interest for tax purposes? That may require looking beyond a single year-to-date interest field.
Regulatory reference: Treas. Reg. §1.163-16(c)(2)(i). See also the TD 10054 preamble discussion referencing §§1.221-1(f) and 1.6050H-1.
4. The lender has to determine whether the loan qualifies
Industry commenters asked Treasury for relief that would have allowed lenders to report vehicle loan interest more broadly and leave the ultimate qualification determination to the taxpayer. Treasury declined.
The lender must determine whether the indebtedness is an SPVL before determining whether section 6050AA reporting applies. That also means establishing whether the underlying vehicle is an Applicable Passenger Vehicle, or APV.
That determination requires information lenders may not historically have needed for tax reporting, including whether original use began with the purchaser, the vehicle’s VIN, GVWR, and whether final assembly occurred in the United States.
The current draft Form 1098-VLI makes those responsibilities visible. In addition to interest and principal, the draft form includes vehicle year, make, model and VIN; original loan origination date; loan acquisition date; and indicators confirming that original use began with the payer of record and that final assembly occurred in the United States.
Refinancing adds another layer. Treasury acknowledged that a refinance lender may not have the original retail installment sales contract or all of the information needed to establish whether the original loan qualified. Nevertheless, the final regulations require the lender to perform adequate diligence to determine whether the refinanced debt is an SPVL.
Regulatory reference: Treas. Reg. §§1.163-16(d)-(e) and 1.6050AA-1; TD 10054 preamble discussion of refinanced SPVLs.
5. This is lifecycle tax reporting, not simply year-end form production
Taken together, the final regulations and revised draft instructions show why lenders should not treat Form 1098-VLI as simply another year-end tax form to produce and file. The information reported on the form depends on decisions and calculations that occur throughout the life of the loan.
Qualification begins at origination, but events throughout the life of the loan can affect reporting. A lender may need to preserve the qualifying and nonqualifying components of the original amount financed and apply the required allocation over time. A refinancing requires determining how much of the refinanced balance remains qualifying. A loan acquisition requires the new holder to retain the original origination date while separately reporting its acquisition date. A change in obligor can affect SPVL status.
Payment activity matters too. The final rules establish payment-ordering and prepaid-interest rules, while the draft Form 1098-VLI instructions include specific treatment for refunds of prior-year overpaid interest.
Servicing arrangements can even affect who files the return. Under the final rules, a party that receives interest on behalf of another person may have the reporting obligation, depending on the arrangement and the information available.
In other words, Form 1098-VLI reporting touches origination, servicing, loan transfers, refinancing, customer tax identity, payment processing, and year-end information reporting.
Regulatory reference: Treas. Reg. §§1.163-16(c)-(d) and 1.6050AA-1(b)-(h); draft Instructions for Form 1098-VLI.
What lenders should be doing now
The final regulations answer many of the policy questions that made it difficult to design a reporting process earlier in the year. The remaining work is increasingly operational.
Lenders should be mapping where the required data exists today and identifying the gaps. In particular, they should understand whether their systems can distinguish qualifying from nonqualifying financed amounts, preserve the SPVL portion of principal, perform the required interest allocation, capture all amounts treated as interest for federal tax purposes, and retain the vehicle and borrower information necessary to support the reporting determination.
That does not mean every piece of Form 1098-VLI reporting belongs in the core loan servicing system. Those systems need to capture the underlying loan, vehicle and payment data and determine the amount of interest eligible for reporting. From there, a tax reporting layer can do much of the year-end heavy lifting: aggregate reportable interest payments by loan and payer, apply the $600 reporting threshold, validate required borrower, vehicle and loan data against IRS reporting rules, identify missing or invalid data before filing, produce and furnish Form 1098-VLI, transmit the returns to the IRS, process IRS responses and manage corrections.
That distinction matters even more because the car loan interest deduction is temporary. Under current law, it applies only through 2028. Lenders will need to make changes to core systems where the required data or calculations do not exist today, but they should be thoughtful about building the entire tax reporting process into those systems for a requirement with a relatively short statutory life. Using a robust information reporting layer for the reporting-specific work can reduce both the implementation burden now and the technology debt left behind later.
One thing is still not final
Despite the final regulations, lenders should not mistake the current Form 1098-VLI for the finished product.
The IRS posted revised draft Form 1098-VLI and draft instructions in early September 2026. Both are expressly marked as drafts and are not for filing. As of September 9, the IRS has not released the final Form 1098-VLI or final instructions.
So there is an important distinction: the substantive regulations are final, but the form and filing instructions are not.
That should not stop implementation work. The final regulations provide enough clarity to build the underlying data, qualification, allocation, and interest-calculation processes. Until the IRS releases the final Form 1098-VLI and instructions, however, lenders should be careful about hard-coding the final reporting output.
For 2026, the hard part of 1098-VLI may not be producing the form at all. It may be making sure the right answer can be produced when it is time to file.
Regulatory reference: TD 10054; September 2026 draft Form 1098-VLI and draft Instructions for Form 1098-VLI, both marked DRAFT—NOT FOR FILING.