Expert Insights

Leasing Lets You Claim the $7,500 EV Tax Credit

Laurance Yap
July 6, 2023
How do you claim the full $7,500 EV tax credit? The list of EVs that qualify for the $7,500 EV tax credit is a short one now that the government's latest regulations have been implemented. However, almost all electric cars qualify for the full EV credit if you lease.
People leasing a car in a dealership

Leasing Lets You Claim the $7,500 EV Tax Credit

Earlier this year, the Federal Government radically reduced the number of vehicles eligible for the full $7,500 tax credit under the Inflation Reduction Act. Less than 20 EVs and plug-in hybrids are now eligible for the credit, which not only requires eligible vehicles to be manufactured in North America, but also use battery components and critical minerals sourced in North America.

Many vehicles previously eligible for $7,500 now only qualify for $3,750, while many vehicles don’t get a credit at all. If you’ve been considering buying an EV, this isn’t good news. But there is good news too: almost any electric car still qualifies for the full $7,500 – if you lease instead of buy.

That’s because the Inflation Reduction Act legislation categorizes leased vehicles as commercial vehicles, and all battery-powered “commercial” vehicles qualify for the $7,500 credit. It seems like a giant loophole in the legislation, but it’s actually the result of significant lobbying by world’s automakers, who lobbied hard for electric car leases to qualify for the credit.

The loophole has upset some politicians, who see it as supporting wealthy car buyers and a distortion of the IRA’s intent to support local production, but it does make leasing the most attractive option for driving an EV, at least for now.

Woman and man looking at tablet together

Why Leasing an Electric Car is a Better Option

Leasing an electric car may be a better choice in the short term for many drivers anyway. Due to their high technological content, and the fact that EV battery technology is evolving at a rapid pace, leasing can function as a sort of technology insurance. At the end of three or four years, you can simply give your electric car back to the dealer and upgrade to a newer, better model without having to worry about battery degradation or how your car’s resale value will be affected because the tech is advancing so rapidly.

Interestingly, while electric car leases have traditionally not been as attractive as leases for gasoline cars, they are getting more affordable. Lease rates and monthly payments are based on how much a vehicle is estimated to be worth at the end of a lease – and those values are rising as more and more EVs hit the used-car market.

EVs have strong resale values because they’re an attractive, affordable ownership proposition, helping drivers save hundreds of dollars a month on gas. Plus most of them can be easily upgraded either by a dealer or with over-the-air updates to receive the latest features on their digital dashboards. Basically, even though electric car tech is advancing rapidly, EVs don’t age as fast as gasoline cars. All of this means that lease payments for EVs are going down, improving affordability.

A recent report from Bloomberg suggests that, thanks to the availability of the $7,500 credit, many more EVs will be leased in the short term. Ford expects almost two-thirds of EV buyers to lease rather than purchase, three times what’s normal in the new-car market; Hyundai’s lease up-take on EVs jumped from 5 to 34 percent at the beginning of this year.

Woman holding up a credit card and man with iphone

Reducing Your Monthly Payments

We would expect that trend to continue as more EVs hit the market. While the number of EV options available to American consumers has never been higher, affordability still remains an issue, with the starting MSRPs of most electric cars still higher than comparable gasoline models. Getting access to as much financial support as possible will be the game-changer for many EV buyers.

The $7,500 credit could either reduce or eliminate the lease down payment, or could reduce monthly payments – either way, consumers don’t have to wait until they file their taxes to see a financial benefit. Americans, and EV drivers, don’t like waiting – leasing may help everyone make the switch to electric that much sooner.