Trystan Casey
Electric vehicles (EVs) are becoming an increasingly popular option for drivers, with leasing being a more attractive choice than buying. This is due to a legislative loophole that allows the originator of the lease, typically the automaker's finance division, to claim a $7,500 tax credit. This credit is intended to make EVs more affordable for consumers and encourage their adoption. However, it is up to the automaker to decide whether to pass on these savings to the lessee in the form of reduced lease payments. This loophole has proven controversial, with some arguing that it benefits wealthy car buyers rather than supporting local production as intended. Despite this, leasing an EV can offer other advantages, such as avoiding the rapid depreciation of new EV models and outdated battery technology.
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What You'll Learn
The tax credit goes to the lessor, not the lessee
If you are leasing an electric vehicle, you should be aware that the tax credit goes to the lessor, not the lessee. This is because a lease is considered a commercial sale to the leasing company, which is typically the automaker's finance division. The lessor can then pass on some or all of the savings to the lessee in the form of lower lease payments. This is often referred to as a “pass-through”, “capitalized cost reduction”, or a “45W” credit.
Leasing an electric vehicle has the added benefit of tax credit eligibility. Because the lessor "owns" the credit, you don't have to worry about claiming the electric vehicle tax credit on your federal return or not qualifying for the credit due to income limits. If the lessor passes on the savings from the tax credit, your monthly lease payments might be lower due to the discount.
The tax credit for leased electric vehicles is currently up to $7,500. However, this credit may be eliminated under certain administrations, such as the Trump administration. Therefore, those in the market for a leased electric vehicle should be aware that they may have a limited time to take advantage of this credit.
It is important to note that the treatment of tax credits for leased vehicles can vary by state and country. For example, in Texas, a leased motor vehicle may be registered in the lessor's name and still qualify for the new resident tax as long as the new resident is named as the lessee under the lease agreement. However, the lessee cannot claim a credit for the tax paid in the lessor's name for the lessor's Texas purchase of the leased vehicle.
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The lessor may pass on savings to you
Leasing an electric vehicle has the added benefit of tax credit eligibility. The lessor owns the tax credit, so you don't have to worry about claiming the electric vehicle tax credit on your federal return or not qualifying for the credit due to income limits. If the lessor passes on the savings from the tax credit to you, your monthly lease payments might be lower because of the discount.
Some manufacturers lure consumers who may want to lease an EV with advertisements for "lease cash," a "lease credit," or an "EV lease bonus." These, and other terms like the "hybrid/electric federal tax credit," essentially refer to the EV tax credit that can reduce the cost of an EV lease. While tax credit enticements could bring down the cost of an electric vehicle lease, recent EV price cuts and state and federal tax incentives could also incentivize people to buy electric vehicles.
Some leased EVs may also be eligible for state and local savings, or even rebates from electric companies. Check the latest updates in resources like Kelley Blue Book's "How Do Electric Car Tax Credits Work" and "Electric Car Rebates and Incentives: What To Know by State."
According to a nationally representative CR American Experiences Survey of 2,121 Americans conducted in April 2023, 30% of respondents would consider buying or leasing an EV, but 55% saw the purchase price as an impediment. A lower monthly payment may help those interested in an EV afford to drive one.
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Leased EVs are considered commercial vehicles
The classification of leased EVs as commercial vehicles also brings certain regulatory considerations. Under IRS regulations, leased EVs are subject to different rules than purchased EVs. For instance, there are no limitations regarding final assembly, battery sourcing, or vehicle pricing for leased EVs. Additionally, the caps on buyer income do not apply to leases since there is no direct purchase involved. This can make leased EVs a more accessible option for individuals who may not qualify for the tax credit when purchasing an EV due to income restrictions.
It is worth noting that the tax credit landscape for leased EVs may be subject to change. The so-called "EV lease loophole" under the Inflation Reduction Act (IRA), which allowed leased EVs to be classified as commercial vehicles, could be eliminated under certain administrations. This means that the tax credit benefits and regulatory considerations previously discussed may evolve over time. As a result, it is essential for individuals considering leasing an EV to stay informed about the latest tax credit policies and how they may impact their leasing decisions.
In summary, leased EVs are considered commercial vehicles, and this classification has implications for both tax credits and regulatory requirements. The tax credit benefit primarily benefits the leasing company, but it can also result in potential savings for lessees if the leasing company chooses to pass on those benefits. Additionally, the regulatory considerations for leased EVs differ from those for purchased EVs, providing some flexibility in areas such as final assembly and battery sourcing. However, it is important to stay updated on potential changes to the EV tax credit landscape, as these incentives may be modified or revoked in the future.
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You don't need to claim the tax credit on your federal return
If you are leasing an electric vehicle, you don't need to claim the tax credit on your federal return. This is because the lessor, usually the automaker's finance division, "owns" the credit. The full $7,500 tax credit goes to the company that leased it to you, and they may choose to pass on these savings to you in the form of a discount on your lease. This is true even if your income would disqualify you from getting the tax credit on a purchased EV, as it is the automaker that receives the credit, not you.
The tax credit for leased vehicles is also not subject to the same restrictions as the consumer tax credit. There are no limitations regarding final assembly, battery sourcing, or vehicle pricing, and buyer income caps are irrelevant as there is no purchase in the case of a lease.
The number of people leasing an electric vehicle has grown in recent years, and this may be partly due to the federal EV lease tax credit "loophole" in the Inflation Reduction Act. This loophole could soon be closed, however, as the Trump administration has indicated its intention to get rid of the credit.
It is worth noting that not all automakers explicitly mention the tax credit in their lease deals, and some may choose not to pass on any savings to the lessee. Additionally, there are some disadvantages to leasing rather than buying an electric vehicle. For example, it can be difficult to terminate a lease if your circumstances change and an electric vehicle no longer meets your needs.
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The tax credit may be revoked in the future
The tax credit is a significant incentive for those who lease electric vehicles, as it can result in hefty discounts on lease payments. The tax credit for leased EVs goes to the lessor, which is typically the automaker's finance division. This means that the lessor can claim a tax credit of up to $7,500 for a leased EV, and they may choose to pass these savings on to the lessee in the form of reduced lease prices.
However, there is no obligation for the automaker to pass on these savings, and the removal of the tax credit would likely result in higher lease prices for consumers. This could have a significant impact on the number of people choosing to lease electric vehicles, as the current tax credit makes these vehicles more affordable for many.
Therefore, while the tax credit for leased electric vehicles is still in effect as of 2025, there is a possibility that it may be revoked in the future, which could have implications for the cost and accessibility of these vehicles.
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Frequently asked questions
You don't need to worry about claiming the tax credit on your federal return as the lessor "owns" the credit. The leasing company can get a full $7,500 tax credit for an EV and may pass some or all of the savings to you in the form of lower lease payments.
Leasing an electric vehicle is a better option than buying as it comes with certain benefits such as tax credit eligibility. Also, leasing an electric vehicle can save you from getting stuck with old technology as the technology is advancing rapidly.
The amount of tax credit that you can claim depends on the manufacturer. For example, Mercedes-Benz offers “Lease Bonus Cash” and Lexus provides “lease cash”. The federal government offers a tax credit of up to $7,500 for purchasing qualifying "clean vehicles".
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