‘Loophole’ could get you a $7,500 tax break for leasing an electric car

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 several rules related to this consumer tax benefits for EVs.

Perhaps the best known of them – the “new clean vehicle“tax credit” is a $7,500 tax credit for consumers who buy a new electric car. Most eligible buyers choose to receive this cash directly from the car dealer at the time of purchase.

But many car dealers also pass along a $7,500 tax credit to renters, through another (and, experts say, less well-known) mechanism called the Qualified Clean Vehicle Tax Credit.

The upshot for consumers: It’s much easier to get than the credit for buyers of new electric cars because it doesn’t come with requirements related to, for example, car production, sticker price or the buyer’s income, experts say.

In other words, the $7,500 may be available to renters, but not to buyers.

This ‘leasing loophole’ for EV tax credits is likely to be a key driver of increased leasing use in 2024, Barclays auto analysts said in an equity research note published in June.

About 35% of new electric vehicles were rented according to Experian in the first quarter of 2024, up from 12% in 2023.

“Want a good deal on buying a car today? Your best bet is to lease an electric car,” Barclays said.

Receipt of the full credit for new clean vehicles – Section 30D of the tax code – is subject to certain vehicle and buyer requirements.

For example, the final assembly of the EV must take place in North America. Different purchasing and production rules also apply to battery components and minerals. Cars cannot exceed a certain sticker price: for example, $55,000 for sedans and $80,000 for SUVs.

As a result, not all EVs are eligible for a tax credit. Some qualify, but only for half ($3,750).

More from Personal Finance:
Are petrol or electric vehicles a better deal?
States are introducing consumer rebates tied to energy efficiency
Rent a car for a road trip or drive yourself?

Thirteen manufacturers making models According to the U.S. Department of Energy, they currently qualify for a tax credit. That list is expected to grow over time as automakers shift production to meet the new rules.

To qualify for the tax credit, buyers’ annual income must also not exceed certain thresholds: for example, $300,000 for married couples filing a joint tax return or $150,000 for single filers.

But consumers can avoid these requirements by leasing.

That’s because leasing qualifies as commercial sales under the Inflation Reduction Act, Barclays said. With a lease, the automaker technically sells the vehicle to a leasing partner, who handles the transactions 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 tenants.

The catch is they don’t have to pass the savings on to drivers, experts say.

However, it seems like “a ton” are doing this right now, says Ingrid Malmgren, senior policy director at Plug In America.

The $7,500 tax credit allows dealers to charge low monthly payments on leases, boosting demand for electric cars, Barclays wrote. In 2024, dealers have leaned more heavily on such lease promotions, in the form of subsidized monthly payments, analysts said. a

Foreign automakers struggling to meet the Inflation Reduction Act’s domestic production requirements are among those doing so.

“Greater EV ambitions from Asia [car manufacturers] Companies like Toyota and Hyundai Kia also heavily exploit the leasing loophole, as their production outside of North America limits their ability to qualify for the consumer credit, but not the commercial credit,” wrote Barclays.

Brian Moody, editor-in-chief of Autotrader, a car shopping site, expects the majority, if not all, of dealers will pass on tax breaks to stay competitive.

“It’s unlikely you would lease one and not get the benefit,” Moody said.

Consumers may want to consider doing a rough calculation of leasing versus buying before making a final choice, including adding up potential tax benefits, interest costs, total car payments and trade-in value, experts said.

While leasing is generally (though not always) more expensive than buying, leasing also comes with non-financial benefits, Malmgren said.

For example, leasing ensures car users always have a new vehicle, and also gives consumers “a great glide path” to determine whether electric cars are right for them without much risk, she said.

Buyers waiting for “next-generation electric vehicles” from certain automakers between 2026 and 2028 can “maintain flexibility” while also providing an advantage to those “wary of technological obsolescence given the rapid pace of development of electric and software defined vehicles,” Barclays wrote. .

That said, it may be more complicated for consumers to untangle how dealers pass on a tax benefit to EV renters versus buyers, experts said.

“I think leases are a bit of a shell game,” Malmgren said. “There are a lot of variables that go into your payment,” which dealers can adjust in a lease contract.

She encourages consumers to take a printout of everything included in the lease to ensure the $7,500 tax credit is reflected in the price.

“Honestly, I would just ask ahead of time,” Moody said. ‘And it must be stated in the text [lease] also documents.”

If it is not easy to understand, consumers should consider switching to another dealer, he added.