Electric vehicle leasing delivers $7,500 tax credit

DETROIT — Thanks to a boost from the government, leasing — not buying — is becoming the most affordable way to get your hands on an electric vehicle.

Last year’s Inflation Reduction Act provided a federal tax credit of up to $7,500 to use toward an EV. Under the rules, a dealer can apply that credit to any leased electric vehicle, no matter where it’s made, to reduce a customer’s monthly payment.

Not so for people who buy an EV.

For buyers, only EVs made in North America qualify for the full tax credit. And only 10 of the 49 electric vehicles for sale in the United States this year meet that requirement. Even then, the EV must contain certain percentages of battery parts from the United States or countries with which it has a trade deal for the buyer to receive a full $7,500 credit.

Why the distinction between leased and purchases vehicles?

The Treasury Department says in establishing the tax credit, Congress classified leased — but not purchased — EVs as “commercial” vehicles. Under the law, commercial vehicles are exempt from the North America manufacturing and battery-content requirements. The result is that people who lease enjoy a much wider selection of EVs that qualify for the $7,500 credit.

“Lease affordability has surpassed purchase affordability” in a J.D. Power index that includes total cost of ownership, said Elizabeth Krear, vice president of the EV practice at J.D. Power.

Many consumers have become aware of the difference and are capitalizing on it. In April, Krear said, leases accounted for 41% of all U.S. EV deliveries — four times the percentage in December, before the new rules took effect.

Geoff Pohanka, president of a 21-dealership group in Maryland, Virginia and Texas, said he is anticipating an increase in leasing. Buyers, he predicts, will increasingly recognize that the tax credit will help defray the typically substantial cost difference between an EV and a similar gas-powered vehicle.

“It definitely makes sense,” he said. “Incentives can move the market if that narrows the affordability issue between gas and electric cars.”

Pohanka, whose group sells vehicles from multiple automakers, said the tax credits have just begun to lower the cost of leasing. Still, the rules governing the credit are complex enough that some buyers appear unsure if they would qualify for it.

The rules not only make distinctions between leased and purchased vehicles. They also include income thresholds that disqualify some buyers.

To qualify for the tax credit, a car cannot cost more than $55,000. SUVs, pickups and vans can’t exceed $80,000. And a buyer’s gross income must be no more $150,000 if single, $300,000 if filing jointly and $225,000 if head of a household.