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Leasing Electric Vehicles Can Help You Qualify for the Tax Credit

When new requirements for the EV tax credit took effect in April, the number of electric vehicles that qualified for the $7,500 tax break dropped dramatically.

Right now only about a dozen cars, mostly from US automakers, are on the IRS’ official list.

But almost any make or model EV is eligible for the full credit if you lease, rather than buy it outright. 

How Does the Leasing Loophole Work?

Currently, $3,750 of the “clean vehicle credit” is dependent on at least half of the battery components being manufactured in North America. You can claim the other $3,750 if at least 40% of its critical minerals are sourced from the US or a trade partner. 

But the Inflation Reduction Act of 2022, which established the new guidance, categorizes leased automobiles as commercial vehicles, which aren’t subject to the same sourcing requirements. Technically, it’s not the consumer who gets the tax break, but the dealership that leases the car. 

“Because the car is still owned by the lessor, they’re the one who can claim the credit,” said Brian Moody, executive editor for Kelley Blue Book. But EV manufacturers, especially foreign ones locked out of the tax credit, are passing the savings along in the form of better leasing terms.

What Should I Know If I Want to Lease an EV?

While many leading EV manufacturers are offering leasing bonuses, Moody said they’re under no obligation to do so. (Tesla, the largest seller of EVs in the US, doesn’t offer a discount, Electrek reported.) “If you’re leasing an EV because you want a lower payment, be sure to ask about it up front,” Moody said.

In addition, the IRS says it is still finalizing the form to claim the commercial clean vehicle credit, and it could issue additional guidance that closes or shrinks the loophole.

Are There Other Benefits to Leasing?

By leasing their EVs, drivers can get the credit applied directly to their monthly payments rather than waiting for their IRS refund. (Buyers won’t be able to use those funds as “cash on the hood” until 2024.) Leasing also allows you to ignore the price and income limitations placed on purchased EVs.

In March, 34% of American EV drivers leased their vehicles, compared with less than 20% of new gasoline-powered cars. (A year prior, only 18% of EVs were leased.) Ford Motor Credit CEO Marion Harris told Bloomberg that leasing could soon account for 60% of the EV market, at least while the list of qualifying vehicles is limited and concerns about technology remain.

What About the Tax Credit for Used EVs?

The Inflation Reduction Act also instituted a tax break for used electric and fuel-cell vehicles that is worth $4,000 or 30% of the sale price, whichever is less.

And unlike new EVs, second-hand cars don’t have to meet any manufacturing requirements. The MSRP must be $25,000 or less, however, and the car must be at least two years old. In addition, the used clean vehicle credit can only be claimed once in a vehicle’s lifetime. And there are income caps if you want to claim the used clean vehicle credit.

Conclusion

Leasing an electric vehicle can help you qualify for the full tax credit of $7,500, and some foreign manufacturers have started offering better leasing terms to pass the savings onto consumers. It’s important to ask about leasing bonuses up front and be aware that the IRS is still finalizing the form to claim the commercial clean vehicle credit. Leasing also provides additional benefits such as applying the credit directly to your monthly payments and ignoring price and income limitations. In addition, the Inflation Reduction Act offers a tax break for used EVs that meet certain requirements.

FAQ

1. Which electric vehicles qualify for the tax credit?

Currently, only about a dozen cars, mostly from US automakers, are on the IRS’ official list of qualifying vehicles for the tax credit.

2. How can I qualify for the full tax credit?

Almost any make or model EV is eligible for the full credit if you lease, rather than buy it outright.

3. Do I need to ask about leasing bonuses up front?

Yes, while many leading EV manufacturers are offering leasing bonuses, they’re under no obligation to do so.

4. What is the tax credit for used EVs?

The tax break for used electric and fuel-cell vehicles is worth $4,000 or 30% of the sale price, whichever is less.

5. Are there income caps for claiming the used clean vehicle credit?

Yes, there are income caps if you want to claim the used clean vehicle credit.

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