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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 was signed into law by President Joe Biden in 2022, contained several rules related to consumer tax relief for EVs.
Perhaps the most famous of them – the “new clean vehicle” Tax credit — is a $7,500 tax credit for consumers who purchase a new EV. Most eligible buyers choose to receive this money directly from the car dealer at the time of purchase.
But many car dealers also pass a $7,500 tax break on to lessees, through a different (and, experts say, lesser-known) mechanism called the “qualified commercial clean vehicle” tax credit.
The result for consumers: It’s much easier to get than the credit for buyers of new electric vehicles because it carries no requirements tied to car make, sticker price or buyers’ income, for example, experts said.
In other words, the $7,500 may be available for renters but not for buyers.
This EV tax credit “lease loophole” was likely the key driver of increased leasing uptake in 2024, Barclays auto analysts said in an equity research note published in June.
About 35% of new electric vehicles were hired in the first quarter of 2024, up from 12% in 2023, according to Experian.
“Want a good deal on buying a car today? Leasing an EV may be your best bet,” Barclays said.
What is the EV Lease Gap?
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Getting the full clean new vehicle credit — Section 30D of the Internal Revenue Code — depends on certain requirements for vehicles and buyers.
For example, the final assembly of the EV must be done 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 electric vehicles qualify for tax credit. Some are eligible, but only for half ($3,750).
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Thirteen manufacturers I make models are currently eligible for tax credits, according to the US Department of Energy. This list is expected to grow over time as automakers change their production to comply with the new rules.
To qualify for the tax break, buyers’ annual income also can’t exceed certain limits: $300,000 for married couples filing a joint tax return or $150,000 for single filers, for example.
But consumers can bypass these requirements by leasing.
That’s because the lease qualifies as a commercial sale under the Deflation Act, according to Barclays. With a lease, the automaker technically sells the vehicle to a leasing partner, who is the one who deals with consumers.
The U.S. Treasury Department issues the tax credit — offered through Section 45W of the tax code — to the leasing partner, who can then pass the savings on to lessees.
Merchants are not obligated to pass on savings
The catch is that they don’t have to pass on their savings to drivers, experts said.
It seems like “a ton” are doing it right now, though, said Ingrid Malmgren, senior policy director at Plug In America.
The $7,500 tax credit enables dealers to charge low monthly lease payments, helping to “stimulate demand” for electric vehicles, Barclays wrote. In 2024, dealers relied more on such leasing promotions, in the form of subsidized monthly payments, analysts said.
Foreign automakers struggling to meet the domestic manufacturing requirements of the inflation-reduction law are among those doing so.
“Bigger EV ambitions from Asia [car manufacturers] such as Toyota and Hyundai Kia also make heavy use of the lease loophole as their production outside of North America limits their ability to qualify for consumer credit but not trade credit,” Barclays wrote.
Brian Moody, executive editor of Autotrader, a car-shopping website, expects most, if not all, dealers to pass on the tax credit savings to stay competitive.
“It’s unlikely you could go lease one and not have the advantage,” Moody said.
EV Leasing Issues for Consumers
Consumers may want to consider doing the rough math on leasing versus buying before making a final choice, including 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 has non-financial benefits, Malmgren said.
For example, leasing ensures that car users always have a new vehicle and also offers “a long glide path” for consumers to determine if EVs are right for them without much risk, he said.
Buyers expecting “next-generation electrics” from some automakers around 2026 to 2028 can “maintain flexibility,” while also providing a benefit to those “wary of technological obsolescence given the rapid pace of EV/software development” , Barclays wrote. .
That said, it can be more complicated for consumers to untangle how dealers pass on a tax credit to EV lessees than it is for buyers, experts said.
“I think leases are a little bit of a shell game,” Malmgren said. “There are many variables that affect your payment” that dealers can modify in a lease agreement.
He 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.
“Honestly, I would ask ahead of time,” Moody said. “And it should be written in [lease] and documents”.
If it’s not easy to understand, consumers should consider moving on to another dealer, he added.
