EV Leasing Loophole: How to Get a $7,500 Tax Credit Without Buying
The Inflation Reduction Act has made electric vehicles more accessible, but the complex rules surrounding the $7,500 federal EV tax credit can be confusing. While most buyers opt to get the credit directly at the point of sale, a lesser-known provision known as the "qualified commercial clean vehicles" tax credit allows lessees to potentially unlock the same $7,500 savings. This "leasing loophole" has led to a significant increase in EV leasing in 2024, with some experts suggesting it’s the best way to get the most attractive deals on electric vehicles.
Key takeaways:
- The EV leasing loophole allows lessees to potentially get the same $7,500 tax credit available to buyers.
- The credit is issued to the leasing partner, which may then pass on the savings to lessees in the form of lower monthly payments.
- This loophole has resulted in a surge in EV leasing, particularly among foreign automakers that struggle to meet the domestic manufacturing requirements for the buyer tax credit.
- Though not all dealers are obligated to pass on the savings, it’s likely that most will to remain competitive.
- Consumers should carefully consider the financial implications of leasing versus buying, including potential tax breaks, interest costs, and resale value.
What is the EV Leasing Loophole?
The new clean vehicle tax credit (Section 30D of the tax code) has specific requirements for vehicles and buyers. The EV must be final assembled in North America with certain battery sourcing and manufacturing requirements. There are also income caps and sticker price limits on eligible vehicles. This has created a situation where some EVs may only be eligible for a half-credit of $3,750, while others don’t qualify at all.
The "qualified commercial clean vehicles" tax credit (Section 45W of the tax code) is the loophole that allows lessees to avoid these stringent requirements. Leasing is considered a commercial sale under the Inflation Reduction Act, meaning the carmaker sells the vehicle to a leasing partner, which then leases it to consumers. The Treasury Department issues the tax credit to the leasing partner, who may then offer lower monthly payments to lessees.
Dealers Aren’t Obligated to Pass On Savings, But Many Are!
While dealers are not obligated to pass on the tax credit savings to lessees, many are doing so to remain competitive and drive demand for EVs.
"Greater EV ambitions from Asian [car manufacturers] such as Toyota and Hyundai Kia also heavily utilize the leasing loophole as their production outside of North America limits their ability to qualify for the consumer credit, but not the commercial credit," Barclays wrote in a recent research note.
Brian Moody, Executive Editor of Autotrader, expects most, if not all, dealers to eventually pass along the tax break savings to lessees. "It’s unlikely you’d go lease one and not get the advantage," he said.
EV Leasing Considerations for Consumers
Leasing can be a great option for consumers who want a new vehicle with lower monthly payments and without the hassle of selling a car later on. It’s also a great way to test-drive EV ownership before committing to a purchase. However, leasing does have drawbacks, including:
- Higher overall costs: Leases are often more expensive than buying over the long run, even with the tax credit factored in.
- Limited mileage: Most leases have a mileage limit that you’ll be penalized for exceeding.
- Hidden fees: Leases can have a variety of hidden fees, including early termination fees, disposition fees, and excess mileage fees.
Before making a decision, consumers should:
- Do the math: Compare the total cost of leasing versus buying, including potential tax breaks, interest costs, and resale value.
- Understand the terms: Carefully read the lease agreement and make sure you understand all the terms and conditions, including mileage limits, fees, and early termination options.
- Ask about the tax credit: Ensure that the tax credit is passed along to lessees in the form of reduced monthly payments.
"I think leases are a little bit of a shell game," said Ingrid Malmgren, Senior Policy Director at Plug In America. "There are many variables that factor into your payment" that dealers 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 credit 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 you’re not comfortable with the terms of a lease or you’re unsure about how the tax credit is being applied, consider moving on to another dealer.
