The Loophole That Lets Almost Any Electric Vehicle Qualify for the $7,500 Tax Credit

The number of electric vehicles that qualify for the EV tax credit dropped dramatically in April, when new requirements for battery and mineral sourcing went into effect.

Right now only about a dozen cars, mostly from US carmakers, fit the bill.

But almost any make or model EV is eligible for the full $7,500 tax break if you lease, rather than buy it outright. 

How does the leasing loophole work?

Currently, $3,750 of the “clean vehicle credit” is dependent on at least half of the battery components being manufactured in North America. You can claim the other $3,750 if at least 40% of its critical minerals are sourced from the US or a trade partner.  

But the Inflation Reduction Act of 2022, which established the new guidance, categorizes leased automobiles as commercial vehicles, which aren’t subject to the same sourcing requirements.

The leasing option was lobbied for heavily by foreign carmakers, especially those from South Korea, Reuters reported.  

Sen. Joe Manchin, a Democrat from West Virginia and chair of the Senate Energy Committee, has opposed the interpretation of the regulations, saying it “bends to the desires of the companies looking for loopholes and clearly is inconsistent with the intent of the law.” 

What to know if you want to lease an EV

Technically, it’s not the consumer who gets the deduction, but the dealership that leases the car. 

“Because the car is still owned by the lessor, they’re the one who can claim the credit,” said Brian Moody, executive editor for Kelley Blue Book.

Many leading EV manufacturers told Electrek they pass the savings on to lessees in the form of lower monthly payments. But they’re under no obligation to do so. (Tesla, the largest seller of EVs in the US, doesn’t offer a lease discount.)

In addition, the IRS says it is still finalizing the form to claim the commercial clean vehicle credit.  
“If you’re leasing an EV because you want a lower payment, be sure to ask about it up front,” Moody said.

Are there other benefits to leasing?

By leasing their EVs, drivers can get the credit applied directly to their monthly payments rather than waiting for their IRS refund. (Buyers won’t be able to use those funds as “cash on the hood” until 2024.)

Leasing also allows you to ignore the price and income limitations placed on purchased EVs.

In March, 34% of American EV drivers leased their vehicles, compared with less than 20% of new gasoline-powered cars. (A year prior, only 18% of EVs were leased.)

Ford Motor Credit CEO Marion Harris told Bloomberg that leasing could soon account for 60% of the EV market, at least while the list of qualifying vehicles is limited and concerns about technology remain.

“Leasing could be a safe way to test the waters for getting an EV,” Moody said. 

What about the tax credit for used EVs?

The Inflation Reduction Act also instituted a tax break for used electric and fuel-cell vehicles that is worth $4,000 or 30% of the sale price, whichever is less.

And unlike new EVs, second-hand cars don’t have to meet any manufacturing requirements. The MSRP must be $25,000 or less, however, and the car must be at least two years old.

In addition, the used clean vehicle credit can only be claimed once in a vehicle’s lifetime. And there are income caps if you want to claim the used clean vehicle credit.

Read On: How to Claim the $7,500 Electric Vehicle Tax Credit