A loophole in the tax code could result in a $7,500 tax credit for individuals who lease an electric vehicle, according to auto analysts.

• The Act includes tax credits for electric vehicles.
• Qualifying for the $7,500 tax credit for purchasing a new EV may be difficult due to specific criteria.
• Leasing an EV may make it easier to obtain a $7,500 credit.
• Automakers may pass along the tax credit by lowering monthly payments.

Consumers can obtain a $7,500 federal EV tax credit not only by purchasing a new electric vehicle but also by leasing a car.

The Inflation Reduction Act, signed by President Joe Biden in 2022, included provisions for consumer tax breaks on EVs.

The most well-known of them is the $7,500 tax credit for consumers who purchase a new electric vehicle (EV). The majority of qualifying buyers choose to receive the funds from the car dealer at the time of purchase.

Lessees are receiving a $7,500 tax break from many auto dealers through a lesser-known mechanism called the "qualified commercial clean vehicles" tax credit.

Lessees may have access to $7,500, but buyers cannot.

The EV tax credit "leasing loophole" is likely a significant factor in the increase of leasing uptake in 2024, according to Barclays auto analysts in a June equity research note.

In the first quarter of 2024, the percentage of new EVs leased increased by 23% compared to the previous year, according to Experian.

Leasing an EV may be your best bet for getting a good deal on buying a car today, according to Barclays.

What is the EV leasing loophole?

The tax code's Section 30D specifies that the full credit for a new clean vehicle can only be received if certain conditions for vehicles and buyers are met.

The final assembly of the EV must take place in North America. The sourcing and manufacturing of battery components and minerals also have specific rules. The sticker price for cars cannot exceed $55,000 for sedans and $80,000 for SUVs.

Which is more cost-effective: gas-powered or electric vehicles? States are offering consumer incentives based on energy efficiency. Should you rent a car for a road trip or drive your own?

The U.S. Energy Department reports that currently thirteen manufacturers produce models eligible for a tax break. This list is predicted to expand in the future as automakers adjust their production to adhere to new regulations.

In order to receive the tax break, individuals' annual income must not exceed specific limits: $300,000 for married couples filing jointly or $150,000 for single filers.

But consumers can sidestep these requirements by leasing.

According to Barclays, the Inflation Reduction Act classifies leasing as a commercial sale, meaning that the car manufacturer technically sells the vehicle to a leasing partner, who then interacts with consumers.

The Treasury Department in the U.S. offers a tax credit through Section 45W of the code to the leasing partner, who can then share the savings with lessees.

Dealers aren't obligated to pass on savings

Experts stated that it is not necessary for them to share their savings with drivers.

Ingrid Malmgren, senior policy director at Plug In America, stated that "a ton" are doing it at the moment.

In 2024, dealers have increasingly relied on leasing promotions, such as subsidized monthly payments, to boost demand for EVs, according to analysts.

Those struggling to meet the Inflation Reduction Act's domestic manufacturing requirements are foreign automakers.

Asian car manufacturers, including Toyota and Hyundai Kia, have greater EV ambitions but are limited in their ability to qualify for consumer credit due to production outside of North America. However, they heavily utilize the leasing loophole for commercial credit, according to Barclays.

Autotrader's executive editor, Brian Moody, anticipates that dealers will pass on tax savings to customers in order to remain competitive.

"You wouldn't get the advantage if you didn't lease one," Moody stated.

EV leasing considerations for consumers

Experts advised that consumers should perform rough calculations on leasing versus buying before making a final decision, taking into account potential tax breaks, interest costs, total car payments, and resale value.

Leasing has both financial and nonfinancial advantages, according to Malmgren.

Leasing provides consumers with a "great glide path" to determine if EVs are suitable for them, without much risk, according to her.

Those who are waiting for next-generation EVs from certain carmakers around 2026 to 2028 can maintain flexibility, while also benefiting from being wary of technological obsolescence given the rapid pace of EV/software-defined vehicle development, according to Barclays.

Experts noted that it may be more difficult for consumers to understand how dealers are transferring tax credits to EV lessees compared to buyers.

Malmgren stated that leases are a bit of a shell game, as there are numerous variables that dealers can manipulate in a lease agreement to affect your payments.

To ensure the $7,500 tax credit is reflected in the pricing, she advises consumers to obtain a printout of all lease details.

""I'd directly state my request and include it in the [lease] documents," Moody stated."

If it's not easy to understand, consumers should consider moving on to another dealer, he said.