As of April 18, the entire structure of the federal tax credit for the purchase of electric vehicles changes definitively. The number of EVs eligible for the $2500 to $7500 credit dropped from dozens of models to just 18 separate vehicles (as of this week).
But there’s a big catch: If you’re leasing an EV, the new provisions that reduce the list of eligible vehicles don’t apply. Most Americans have never leased a car, but the prospect of a $3750 or $7500 discount off the price of a desirable EV might convince a lease-hold buyer to run the numbers and see what the difference is.
From Dozens to Just 18
The incentive structure changed after the Inflation Reduction Act was signed by President Joe Biden last August. Senator Joe Manchin, who cast the critical vote to pass the act, pushed hard to limit federal tax incentives only to EVs that would support the US economy, and jump-start domestic battery mineral and cell fabrication industries. The goal is to ensure that US EV makers are not dependent on, and exposed to, China—by far the most prolific global source of minerals for all types of battery cells.
In practice, the IRA provision made by Manchin means that the EV has to be built in the US, Canada or Mexico to qualify. Even more difficult, its battery cells are also forced to use minerals sourced from a specific list of “friendly” countries that notably excludes China. Ultimately, those cells and battery packs had to be made in the US
The result is that only a minority of EVs on the market qualify for any federal purchase credits at all. Many EVs that received federal credits last year won’t receive credits this year—though separate state, local, and corporate incentives may continue to apply.
The EPA’s Fueleconomy.gov website lists eligible vehicles (click the button for vehicles placed in service on or after April 18 to see the list). As of June 5, 18 different EV variants are eligible—a minority of the several dozen different battery electric and plug-in-hybrid models on sale this year. Note that eligible vehicles must carry an MSRP below $55,000 for a passenger car or $80,000 for a light-duty truck, which includes most crossovers and SUVs as well as pickup trucks.
Are Kia EV Rentals “Commercial Vehicles”?
In December, the US Treasury Department released its guidance for interpreting new rules set forth in the Inflation Reduction Act. Under the law, Congress exempts “commercial” vehicles, the definition most often used for medium- and heavy-duty trucks, from domestic content regulations.
But, the Treasury said, since the dealer buys the vehicle and leases it to the driver, it is a commercial transaction, as the driver or end user does not take ownership of the vehicle. Instead, either the dealer or the finance company holding the lease retains ownership and receives a tax credit. The department appropriately defines leased EVs—but not purchased EVs—as “commercial” vehicles.
Since North American battery content and manufacturing regulations do not specifically apply to commercial vehicles, anywhere Leased EVs can qualify for the credit—especially including those built overseas. Despite the displeasure from Senator Manchin, a Treasury spokesman told the Associated Press in a statement, “There is no room for Treasury interpretation.”
“Eligibility for the commercial vehicle credit is a direct reading of the Inflation Reduction Act as written by Congress and the application of the old tax law on leased assets,” he said.
Dealers are still trying to understand which eligible EVs they can sell directly while assuring buyers that the car qualifies for the tax credit—and how best to explain and close leases on other EV models with buyers who have historically been reluctant to lease, or even consider it.
Do You Want To Know About Leasing?
Still, automakers and dealers alike expect EV leasing to soar, perhaps reaching half or more of all EV sales. Data from Seriesmotor showed leasing made up 34 percent of total EV sales in March, up from just 18 percent in March 2023. The CEO of Ford Motor Credit told Bloomberg the automaker’s lending division expects six in 10 US EV drivers to lease in the short term . That’s three times the rate for vehicles with gasoline or diesel engines.
Three pieces of advice to EV buyers looking to lease: First, note that automakers, dealers and financial institutions holding the lease are not required to pass on the tax credit, or its full value, to the end lessee—and some don’t. The lessee has every right to withhold some or all of that value, so check the numbers to make sure you’re getting the full value of that $7500 or $3750 credit.
Many lessees will use the credit to cut lease payments, making EVs more affordable. One example: Subaru and its Japanese-built Solterra electric SUV. A mailer from the company this week said, “New 2023 Subaru Solterra models leased through Subaru Motors Finance are eligible for a $7,500 incentive that will be used to lower lease payments.”
Second, note that if the credit is applied to a lease, it reduces the monthly payment immediately—whereas if you bought the same EV, you may have to wait a year or more to apply the credit to your taxes. However, from next year, buyers will have the option to transfer purchase credits to dealers to reduce the amount paid—although this provision is awaiting its own Treasury guidance.
As usual, there are many qualifications, exemptions and provisions in the EV tax credit that are too complicated to cover here. If you take away one thing, it should be this: You can take advantage of a tax credit on almost any high-priced electric vehicle if you lease it.
Third and finally, the list of EVs eligible for full purchase credit will grow steadily. Many automakers have reshuffled their global production mix to build new EVs, and the cells that power them, in North America. As more cars are “offshored”, as mining and mineral processing expand outside of China, and as more cell plants go into production, more and more vehicles will join the list.
Meanwhile, if the specific EV you want isn’t on that EPA list, your dealer should be happy to talk to you about a lease.
John Voelcker edited Green Car Report for nine years, published more than 12,000 articles on hybrids, electric cars, and other low- and zero-emission vehicles and the energy ecosystem around them. He currently covers advanced auto technology and energy policy as a reporter and analyst. His work has appeared in print, online and radio media including Wired, Popular Science, Technology Review, IEEE Spectrum, and NPR’s “All Things Considered.” He splits his time between the Catskill Mountains and New York City and still has hopes of one day becoming an international man of mystery.