How the IRA Leasing Loophole is Making EVs More Affordable in the US

Last updated 03/19/2024 by

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Summary:

The Inflation Reduction Act’s exemption offers drivers leasing electric vehicles a $7,500 tax credit, regardless of the car’s origin or the materials in its battery. The article discusses how this incentive has led to an increase in EV leasing, with the CEO of Ford Motor Credit expecting 60% of EV drivers in the US to lease instead of buy. The lease option is an IRA loophole that international automakers lobbied for and secured after fearing they would miss out on the IRA tax credits. However, some lawmakers have expressed concerns that the credit may become a subsidy for wealthy car buyers.

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How EV Leasing Became a No-Brainer in the US

As electric vehicles (EVs) become more popular and affordable, more people are considering making the switch from traditional gasoline-powered cars. However, many are deterred by the higher upfront costs of purchasing an EV, even with the federal tax credit of up to $7,500 available for eligible models.

Recently, though, a tax loophole in the Inflation Reduction Act has made EV leasing a no-brainer for many Americans. This loophole is worth $7,500 to drivers who lease, which is an exemption that many EVs qualify for.

This has led to a rise in EV leasing, with experts predicting that it could become the dominant way Americans access EVs. Leasing has already risen significantly since the US Department of the Treasury opened the loophole in December 2021 by characterizing leased EVs as commercial vehicles.

How the Tax Loophole Works

Under the new federal rules, leased vehicles are exempt from restrictions on where the car is made, where its battery materials come from, and how much money the consumer makes. Those stipulations on purchased EVs are designed to promote North American production of battery-powered vehicles. Fewer than a dozen EVs qualify for the full $7,500 tax credit if purchased by a consumer. But all battery-powered models benefit from it if they’re leased because the IRA categorizes them as commercial vehicles.

The lease option is an IRA loophole that many automakers lobbied for and secured after fearing they’d be shut out of the IRA tax credits aimed at stimulating the nascent EV market in the US. International automakers lobbied for and secured it after fearing they’d be shut out of the IRA tax credits aimed at stimulating the nascent EV market in the US.

Advantages of Leasing EVs

Leasing has become more attractive to consumers due to the loophole in the IRA. For example, leasing allows the $7,500 tax credit to be applied immediately to the monthly payment, instead of waiting to get the money back next year when filing taxes. Furthermore, leasing acts like technology insurance for customers who are concerned about replacing the battery on their electric car if it eventually runs dry and can no longer be recharged. Higher resale values lead to lower lease payments because the car is worth more at the end of the lease.

WEIGH THE RISKS AND BENEFITS

Here is a list of the benefits and drawbacks to consider when leasing an EV to take advantage of the IRA tax loophole.

Pros

Qualify for $7,500 tax credit on leased EVs regardless of where it is made, where its battery materials come from, and how much money the consumer makes
Lease payments are lower than purchasing the vehicle, as you pay only for the car’s depreciation during the lease term
You can get a new EV at the end of each lease term, avoiding worries about the vehicle’s resale value and battery replacement costs
You can apply the tax credit immediately to your monthly payment instead of waiting for your tax refund next year
Leasing acts as technology insurance for customers who are concerned about replacing the battery if it eventually runs dry and can no longer juice up

Cons

At the end of the lease term, you don’t own the car and need to return it to the leasing company
You are limited to a certain number of miles you can drive per year, and if you exceed it, you may have to pay extra fees
If you terminate the lease early, you may face steep fees and penalties
The tax loophole may be closed in the future, and leased EVs may not qualify for tax credits anymore
You will be paying interest and fees to the leasing company that can add up to the overall cost of the vehicle

Implications for the EV Market

The favorable factors of EV leasing are likely to make leasing the dominant way Americans gain access to EVs. Marion Harris, CEO of Ford Motor Credit, the automaker’s lending arm, expects 60% of EV drivers in the US to lease in the short term, rather than buy, which is three times more than the 20% lease rate of vehicles with traditional internal combustion engines.

However, not everyone is happy about the leasing loophole in the IRA. Senator Joe Manchin, the West Virginia Democrat who put restrictions in the IRA to promote domestic production of EVs and batteries and prevent the tax credits from becoming a subsidy for wealthy car buyers, criticized the exemption as inconsistent with the intent of the law. Some Congressional Republicans have also opposed federal stimulus for EVs.

Key takeaways

The Inflation Reduction Act exemption allows electric vehicle lessees to benefit from a $7,500 tax credit regardless of the car’s origin or battery materials
Favorable factors are expected to make leasing the dominant way Americans gain access to EVs
EV leasing has been on the rise since the US Department of the Treasury opened the loophole by categorizing leased EVs as commercial vehicles in December
Leasing EVs allows immediate credit application to monthly payments and may increase resale values, leading to lower lease payments
Lawmakers have raised concerns that the credit may become a subsidy for wealthy car buyers

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