Wiktor Wise
The federal government offers tax credits to those who purchase or lease qualifying new or used electric vehicles (EVs). The EV tax credit is part of the government's recognition of the importance of the electrification of the transportation industry in combating climate change. The amount of the tax credit depends on various factors, including the type of vehicle, its specifications, and the income of the buyer. The process of claiming the tax credit involves filing IRS Form 8936 with the necessary vehicle information. While individual consumers cannot directly claim the EV tax credit when leasing, they may benefit from potential savings passed down by the dealer. This guide will explore the eligibility criteria, incentives, and steps to claim the federal tax credit for an electric vehicle lease.
| Characteristics | Values |
|---|---|
| Amount of tax credit | Up to $7,500 for a new EV, $4,000 for a used EV |
| Who can claim the credit | The lessor, not the lessee |
| Vehicle type | Plug-in electric or fuel cell |
| Battery capacity | At least 7 kWh |
| Purchase price | $25,000 or less |
| Model year | At least two years old |
| Weight | Less than 14,000 pounds |
| Frequency of claim | Once every three years |
| Form | File Form 8936 with your federal income tax return |
| Other incentives | State and local incentives, federal EV charging infrastructure credit |
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What You'll Learn
The tax credit goes to the leasing company, not the lessee
The federal government recognizes the crucial role of the electric transport industry in combating climate change. The Inflation Reduction Act (IRA) provides for a federal tax credit of up to $7,500 for the purchase or lease of a new electric vehicle (EV). The IRA contains billions of dollars in clean energy tax incentives. However, the tax credit for leased electric vehicles goes to the leasing company, not the lessee.
Under the IRA, leased electric vehicles are classified as ""commercial vehicles," making them eligible for the full federal clean vehicle credit without meeting strict battery and sourcing requirements. The leasing company may use the fair market value deduction to reduce the vehicle's taxable value. No tax is due on the lease payments made by the lessee under a lease agreement. The lessee cannot claim a credit for tax paid in the lessor's name for the lessor's purchase of the leased vehicle.
While individual consumers can't claim the EV tax credit when leasing an EV, they might still benefit from some savings passed down from the dealer. Dealers are not required to give customers a discount on their leases, so it may require negotiating. Dealers who do pass on the savings may do so in the form of a rebate or reduced lease price.
The commercial credit is less restrictive than the clean vehicle credit available to individual taxpayers. It allows businesses to claim tax breaks for a wider range of eligible electric vehicles, including those not manufactured in the U.S. The EV purchaser must be a taxpayer who is not a dependent of another taxpayer. The EV must be purchased for use and not be acquired for resale. The EV must have a Gross Vehicle Weight Rating (GVWR) of under 14,000 pounds and be manufactured for use on public streets with at least four wheels.
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The vehicle must be for personal use, not resale
When it comes to claiming a federal tax credit for an electric vehicle lease, there are several important factors to consider. One key requirement is that the vehicle must be for personal use and not intended for resale. This condition is in place to prevent individuals from claiming tax credits for vehicles that they do not intend to use for their personal transportation. It is important to note that leased electric vehicles are classified as "commercial vehicles" under IRS regulations, which means that the tax credit typically goes to the leasing company or automaker, who may then choose to pass on the savings to the lessee.
The requirement that the vehicle must be for personal use and not for resale is just one of several eligibility criteria for claiming a federal tax credit on an electric vehicle lease. Other factors to consider include the timing of the lease, your personal or household income level, and the vehicle's eligibility. For example, to qualify for a clean vehicle tax credit, your modified adjusted gross income (MAGI) must be below a certain threshold, which varies depending on your filing status. Additionally, the vehicle must meet certain requirements, such as having a Gross Vehicle Weight Rating (GVWR) of under 14,000 pounds and being manufactured for use on public streets with at least four wheels.
It is also worth noting that the federal tax credit for electric vehicles is subject to change and updates. For example, the Inflation Reduction Act (IRA) introduced new opportunities for consumers to save on clean vehicles, offering multiple incentives for the purchase or lease of electric vehicles. These incentives include tax credits for the vehicles themselves, as well as associated equipment such as chargers. The IRA also revived a tax credit for electric vehicle chargers, known as the "Alternative Fuel Refueling Property Tax Credit," which is available through 2032.
While the federal tax credit provides a significant incentive for individuals considering an electric vehicle lease, it is important to remember that the credit belongs to the lessor, not the lessee. This means that the leasing company or automaker receives the tax benefit directly. However, they may choose to pass on some or all of the savings to the lessee, effectively lowering the cost of the lease. This negotiation process may require some research and discussion with the leasing company to ensure that any potential savings are passed on to you as the consumer.
Overall, the requirement that the vehicle must be for personal use and not for resale is a crucial aspect of claiming a federal tax credit for an electric vehicle lease. This condition ensures that the tax credits are utilized for their intended purpose of promoting the adoption of electric vehicles for personal transportation, while also encouraging the development and use of clean energy technologies to combat climate change. By understanding and meeting these eligibility criteria, individuals can take advantage of the financial benefits offered by the federal government to support the electrification of the transportation industry.
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The vehicle must be plug-in electric or a fuel cell
To qualify for a federal tax credit, the vehicle must be plug-in electric or a fuel cell with at least 7 kilowatt-hours of battery capacity. This means that the vehicle must be propelled by an electric motor that draws power from a battery of at least 7 kWh and be able to charge from an external source of electricity.
Fuel cell cars are available for sale or lease by major automakers and are eligible for a tax credit. They are powered by an electric motor and are therefore classified as e-cars. An example of a fuel cell car is the BMW iX5 Hydrogen. Unlike battery-powered or plug-in hybrid cars, fuel cell cars are powered by hydrogen, which reacts electrochemically to produce electricity to power the car. The construction of the fuel cell is similar to a battery, but instead of storing electrical energy, it transforms the fuel's chemical energy into electrical energy. This electricity then powers the car's electric motors.
Hydrogen fuel cell cars have several advantages, including zero tailpipe emissions, a long range of 300-400 miles, and quick refuelling times comparable to standard cars. They are also very energy efficient, quiet, and have equivalent range and performance to gasoline counterparts. Additionally, leasing a fuel cell car can be more cost-effective, as current leasing packages often include fuel, service, and maintenance.
It is important to note that the availability of hydrogen fuel cell cars may be limited, as they are much rarer than electric vehicles. As of mid-2022, there were 17,000 or fewer hydrogen-powered vehicles on US roads, and they were only available in California due to the state's network of retail hydrogen fueling stations. However, stakeholders are working to increase the availability of hydrogen fuel and expand the market for fuel cell electric vehicles.
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The purchase price of the car must be $25,000 or less
To qualify for the federal tax credit for an electric vehicle, the purchase price of the car must be $25,000 or less. This price cap applies to both new and used electric vehicles.
For new electric vehicles, the $25,000 limit refers to the manufacturer's suggested retail price (MSRP). The MSRP is defined by the IRS as the base retail price provided by the manufacturer, plus the retail price of each accessory or optional piece of equipment that is physically present on the car at the time of delivery to the dealer.
For used electric vehicles, the $25,000 limit includes all dealer-imposed costs or fees not required by law. It does not include taxes or title and registration fees required by state or local law. The vehicle must be purchased from a licensed dealer and cannot have been previously transferred to a qualified buyer.
It's important to note that the tax credit is non-refundable, which means it can lower or eliminate your tax liability, but you won't receive any refund for any excess credit. Additionally, the credit can only be claimed once every three years.
To claim the federal tax credit, you can file Form 8936 when you file your federal income taxes. Alternatively, you can choose to transfer the credit to an eligible dealer for an immediate discount on the vehicle at the time of purchase.
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The car must be at least two model years old
To be eligible for a federal tax credit, the car model must be at least two model years old. This means that the car must be at least two years older than the calendar year in which it was purchased. For example, if you are buying a car in 2024, the car model year must be 2022 or older. This requirement only applies to used cars—if you are buying a new car, this criterion does not apply.
The used EV tax credit only applies once in the vehicle's lifetime. This means that subsequent owners of the same vehicle are not eligible for the tax credit. In addition, once a buyer has taken the federal used EV credit, they are not eligible for another credit for three years. This means that if you claim the tax credit for a used EV, you cannot claim it again for another used EV for at least three years.
It is important to note that leased electric vehicles are classified as commercial vehicles under IRS regulations. This means that the full $7,500 tax credit goes to the company that leased it to you, which is usually the automaker's captive finance arm. In other words, the automaker itself effectively gets the benefit of the tax credit. However, this also means that leased EVs are not subject to the same restrictions as purchased EVs. There are no limitations regarding the final assembly or battery sourcing of a leased EV, for example.
While the dealership gets the tax credit for purchasing the car, they may pass down the savings by lowering the leasing cost by the credit amount. However, dealers are not required to do this, so it may require some negotiation on the part of the lessee. Assessing the transparency of any deal that claims the savings are being passed down may also require research and shopping around to ensure you are getting the best deal.
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Frequently asked questions
Yes, there is a tax credit available for leased electric vehicles. However, the tax credit belongs to the lessor, not the lessee.
The federal tax credit for electric vehicle leases is up to $7,500.
To be eligible for the tax credit, the leased electric vehicle must be used for business purposes and meet certain requirements, such as having a Gross Vehicle Weight Rating (GVWR) of under 14,000 pounds and being manufactured for use on public streets with at least four wheels.
To claim the tax credit, you need to file IRS Form 8936 with your federal income tax return and provide the Vehicle Identification Number (VIN) for the leased electric vehicle.
Yes, there may be additional incentives available at the state and local levels. For example, California's Clean Air Vehicle program grants carpool lane access to select electric vehicles, and New Yorkers may be eligible for a state-level rebate of up to $2,000 on top of the federal tax credit.
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