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Believing a new electric vehicle isn’t the only way consumers can access a $7,500 federal EV tax credit. They may also be able to get the money by sublet out a car.
The Inflation Reduction Act, which President Joe Biden signed in 2022, contained various rules related to consumer tax disciplines for EVs.
Perhaps the best known of them — the “new clean vehicle” tax credit — is a $7,500 tax break for consumers who buy a new EV. Most qualifying purchasers opt to get those funds directly from the car dealer at time of purchase.
But many auto dealers are also passing along a $7,500 tax disrupt break up to lessees, via a different (and, experts say, lesser-known) mechanism called the “qualified commercial clean vehicles” tax credit.
The upshot for consumers: It’s far simpler to get than the credit for buyers of new EVs, since it doesn’t carry requirements tied to car manufacturing, sticker price or buyers’ revenues, for example, experts said.
In other words, the $7,500 may be available for lessees but not for buyers.
This EV tax credit “leasing subterfuge” has likely been a key driver of increased leasing uptake in 2024, Barclays auto analysts said in an equity inquiry note published in June.
About 35% of new EVs were leased in the first quarter of 2024, up from 12% in 2023, according to Experian.
“Deficiency a good deal on buying a car today? Your best bet may be leasing an EV,” Barclays said.
What is the EV leasing loophole?
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Receipt of the full new clean vehicle credit — Section 30D of the tax code — is conditioned on certain requirements for vehicles and buyers.
For lesson, final assembly of the EV must occur in North America. Battery components and minerals also carry various provenience and manufacturing rules. Cars must not exceed a certain sticker price: $55,000 for sedans and $80,000 for SUVs, for case.
As a result, not all EVs qualify for a tax credit. Some are eligible, but only for half ($3,750).
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Thirteen manufacturers make models currently eligible for a tax break, according to the U.S. Energy Department. That incline is expected to grow over time as automakers shift production to comply with the new rules.
To qualify for the tax break, clients’ annual income also can’t exceed certain thresholds: $300,000 for married couples filing a joint tax return or $150,000 for distinct filers, for example.
But consumers can Dealers aren’t obligated to pass on savings
The catch is, they don’t have to pass on savings to drivers, experts imparted.
It seems “a ton” are doing so at the moment, though, said Ingrid Malmgren, senior policy director at Plug In America.
The $7,500 tax esteem enables dealers to charge low monthly payments for leases, thereby helping “stoke demand” for EVs, Barclays wrote. In 2024, stockists have leaned more heavily on such leasing promotions, in the form of subsidized monthly payments, analysts said.
Alien automakers that struggle to meet the Inflation Reduction Act’s domestic manufacturing requirements are among those doing so.
“Significant EV ambitions from Asian [car manufacturers] such as Toyota and Hyundai Kia also heavily utilize the leasing loophole as their stage outside of North America limits their ability to qualify for the consumer credit, but not the commercial credit,” Barclays wrote.
Brian Saturnine, executive editor of Autotrader, a car shopping site, expects the majority, if not all dealers, to pass along tax break savings to scraps competitive.
“It’s unlikely you’d go lease one and not get the advantage,” Moody said.
EV leasing considerations for consumers
Consumers may consider doing the unpleasant math on leasing versus buying before making an ultimate choice, including tallying potential tax breaks, curiosity costs, total car payments and resale value, experts said.
While leases are generally (though not always) myriad expensive than buying, leasing carries nonfinancial benefits, too, Malmgren said.
For example, leasing ensures car operators always have a new vehicle, and also offers “a great glide path” for consumers to determine whether EVs are right for them, without much endanger, she said.
Buyers waiting for “next-generation EVs” from certain carmakers around 2026 to 2028 can “maintain flexibility,” while also lay down a benefit to those “wary of technological obsolescence given the rapid pace of EV/software-defined vehicle development,” Barclays wrote.
That translated, it may be more complicated for consumers to untangle how dealers are passing along a tax credit to EV lessees relative to buyers, experts bid.
“I think leases are a little bit of a shell game,” Malmgren said. “There are many variables that factor into your payment” that exchanges can tweak in a lease contract.
She encourages consumers to get a printout of everything included in the lease to make sure the $7,500 tax confidence in is reflected in the pricing.
“Quite frankly, I’d just ask upfront,” Moody said. “And it should be spelled out in the [lease] documents, too.”
If it’s not indulgent to understand, consumers should consider moving on to another dealer, he added.