In the year 2022, President Joe Biden signed the Inflation Reduction Act, which not only had significant rules related to consumer tax breaks for electric vehicles but also included a $7,500 federal EV tax credit that could be accessed by consumers through leasing a car. This tax credit, known as the “qualified commercial clean vehicles” tax credit, is a lesser-known mechanism compared to the more well-known “new clean vehicle” tax credit. While most buyers opt to receive the $7,500 directly from the car dealer at the time of purchase, many auto dealers are now passing on the tax break to lessees. This loophole in the EV tax credit system has led to an increase in leasing uptake, with about 35% of new EVs being leased in the first quarter of 2024, a significant rise from 12% in 2023.
Unlike the tax credit for buyers of new EVs, the tax credit for lessees does not have requirements tied to car manufacturing, sticker price, or buyers’ income. This makes it far easier for consumers to access the $7,500 tax credit through leasing. The requirements for the full tax credit under Section 30D of the tax code include that the final assembly of the EV must occur in North America, certain rules regarding battery components and minerals sourcing and manufacturing, and price limits of $55,000 for sedans and $80,000 for SUVs. However, not all EVs qualify for the tax credit, with some being eligible for only half of the amount.
Consumers can avoid these requirements by opting for leasing, as it is considered a commercial sale under the Inflation Reduction Act. The leasing partner, to whom the carmaker technically sells the vehicle, is the one transacting with consumers. The U.S. Treasury Department issues the tax credit through Section 45W of the tax code to the leasing partner, who may then pass on the savings to lessees. While these savings are not required to be passed on to drivers, many leasing companies are currently doing so to incentivize the lease of EVs.
Leasing an EV not only provides access to the $7,500 tax credit but also offers nonfinancial benefits. Leasing ensures that car users always have a new vehicle, allowing them to experience the latest EV technology without committing to ownership. This can serve as a great way for consumers to test whether EVs are a suitable option for them without much risk. Additionally, consumers waiting for next-generation EVs can maintain flexibility by leasing, rather than buying, while also avoiding concerns about technological obsolescence in rapidly evolving EV development.
It is important for consumers to carefully review the lease agreement to ensure that the $7,500 tax credit is reflected in the pricing. According to experts, leases can sometimes be a “shell game” with various variables that dealers can adjust to manipulate lease payments. Consumers are advised to request a detailed printout of all costs included in the lease and to inquire upfront about how the tax credit is being applied. If the lease agreement is unclear or confusing, consumers should consider seeking clarification from the dealer or exploring other leasing options to ensure full transparency in the leasing process.