Optima Tax Relief Reviews the EV Tax Credit Loophole   

As the shift towards electric vehicles (EVs) continues to gain momentum, federal tax incentives have become a key driver in helping consumers afford these eco-friendly cars. The Inflation Reduction Act of 2022 extended and expanded the Clean Vehicle Credit, offering a tax credit of up to $7,500 to qualifying buyers of new electric vehicles. However, as with many tax provisions, there is a loophole that savvy consumers can leverage—leasing an EV instead of buying one outright. Optima Tax Relief reviews the credit and how lessees can take advantage of it.  

The Standard EV Tax Credit: A Quick Overview 

Under the Clean Vehicle Credit, individuals who purchase a new electric vehicle are eligible for a tax credit of up to $7,500, depending on the vehicle’s battery size and sourcing of critical minerals. However, to qualify, there are several conditions. 

• Income caps: Buyers must have a modified adjusted gross income (MAGI) of $150,000 or less for individuals, $225,000 for heads of households, and $300,000 for joint filers.
  

• Price caps: For sedans, the purchase price must be below $55,000. For SUVs, trucks, and vans, it must be under $80,000.
  

• Manufacturing: The vehicle must meet strict domestic sourcing requirements for battery materials and undergo final assembly in North America.
  

These restrictions limit who can claim the credit and which vehicles qualify. But leasing offers a way to bypass many of these rules. 

The Leasing Loophole: How It Works 

The key to the leasing loophole lies in how the tax credit is structured when an EV is leased. When an individual leases an EV, the leasing company—not the lessee—is technically the one “buying” the vehicle. Therefore, the leasing company becomes eligible for the $7,500 federal tax credit. In practice, the leasing company often passes savings on to the consumer in a different form through a lesser-known credit called the Qualified Commercial Clean Vehicles tax credit.  

This is beneficial for lessees for a few reasons. First, when leasing, lessees do not have to meet the income caps or vehicle price thresholds that apply to EV buyers. Even high-income earners or those opting for luxury EVs with price tags above $55,000 can benefit indirectly from the federal credit. In addition, many EVs that do not meet the strict domestic manufacturing requirements to qualify for the purchase credit are still eligible for the leasing credit. This includes models produced outside of North America or with batteries that do not meet the sourcing rules. Finally, lessees can reap immediate financial benefits. Instead of waiting until tax season to claim the credit, consumers leasing an EV may see the benefit immediately in reduced lease costs, making the vehicle more affordable month-to-month. 

Is Leasing Always a Better Option? 

While the leasing loophole offers clear advantages, there are considerations to weigh before deciding whether to lease or buy an electric vehicle. For example, leasing means you never actually own the car, and at the end of the lease term, you’ll need to return the vehicle unless you choose to buy it at its residual value. If you prefer long-term ownership, purchasing may still be the better option despite the stricter credit rules. Leasing also usually comes with mileage limits. Exceeding them could result in additional fees. For those who drive frequently, this could offset the savings gained from the tax credit. There’s also the total cost to consider. Leasing may lower your immediate costs, but over the long term, it could end up being more expensive compared to purchasing, especially if you intend to keep the vehicle beyond the typical 36-month lease period. 

What to Watch For 

If you’re considering taking advantage of the leasing loophole, here are a few tips. 

1. Negotiate the Lease Terms: Ensure that the leasing company is passing the federal tax credit savings on to you. Not all leasing companies are transparent about how much of the $7,500 credit is being applied to your lease, so ask for clear documentation.
   
2. State-Level Incentives: In addition to the federal credit, many states offer additional rebates or incentives for electric vehicles. Check whether these incentives apply to leases as well as purchases.
3. New IRS Guidelines: As the government continues to refine its EV tax credit policies, new regulations may close or modify this loophole. It’s wise to stay informed on any upcoming changes.

Conclusion 

The leasing loophole offers a significant workaround for many consumers who may not otherwise qualify for the federal EV tax credit when purchasing an electric vehicle. By leasing, individuals can still take advantage of the $7,500 credit without the restrictive income caps, price limits, or domestic manufacturing rules. However, leasing isn’t for everyone, and it’s important to weigh the long-term financial impacts before making a decision. In a time when the EV market is expanding rapidly and more buyers are considering making the switch, understanding this loophole could help make going electric a more accessible and affordable option.