Buying 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 leasing a car. The Inflation Reduction Act, which President Joe Biden signed in 2022, contained various rules related to consumer tax breaks 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 buyers opt to get those funds directly from the car dealer at time of purchase. However, many auto dealers are also passing along a $7,500 tax break 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 easier to get than the credit for buyers of new EVs, since it doesn’t carry requirements tied to car manufacturing, sticker price or buyers’ income, for example, experts said.
This EV tax credit “leasing loophole” has likely been a key driver of increased leasing uptake in 2024, Barclays auto analysts said in an equity research 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.
Receipt of the full new clean vehicle credit – Section 30D of the tax code – is conditioned on certain requirements for vehicles and buyers. For example, final assembly of the EV must occur in North America. Battery components and minerals also carry various sourcing and manufacturing rules. Cars must not exceed a certain sticker price: $55,000 for sedans and $80,000 for SUVs, for example. As a result, not all EVs qualify for a tax credit. Some are eligible, but only for half ($3,750).
Consumers can sidestep these requirements by leasing. That’s because leasing is qualified as a commercial sale under the Inflation Reduction Act. With a lease, the carmaker technically sells the vehicle to a leasing partner, which is the one transacting with consumers. The U.S. Treasury Department issues the tax credit – offered via Section 45W of the tax code – to the leasing partner, which may then pass on the savings to lessees.
The catch is, dealers don’t have to pass on savings to drivers, experts said. However, “a ton” are doing so at the moment, according to Ingrid Malmgren, senior policy director at Plug In America. The $7,500 tax credit enables dealers to charge low monthly payments for leases, thereby helping “stoke demand” for EVs, Barclays wrote.
Consumers may consider doing the rough math on leasing versus buying before making an ultimate choice, including tallying potential tax breaks, interest costs, total car payments and resale value, experts said. While leases are generally (though not always) more expensive than buying, leasing carries nonfinancial benefits, too, Malmgren said. For example, leasing ensures car users always have a new vehicle, and also offers “a great glide path” for consumers to determine whether EVs are right for them, without much risk.
Experts cautioned that it may be more complicated for consumers to untangle how dealers are passing along a tax credit to EV lessees relative to buyers. “I think leases are a little bit of a shell game,” Malmgren said. Consumers should consider getting a printout of everything included in the lease to make sure the $7,500 tax credit is reflected in the pricing. If it’s not easy to understand, consumers should consider moving on to another dealer, experts advised.
While accessing the $7,500 tax credit for electric vehicle leases may seem like a straightforward process, there are nuances and considerations that consumers should be aware of before making a decision. Understanding the implications of leasing versus buying, as well as ensuring transparency in how the tax credit is passed along by dealers, are crucial steps in leveraging this financial incentive to transition to cleaner, more sustainable transportation options.
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