EV Leasing In The US Is A No-Brainer Thanks To A Tax Loophole

In the future, Alistair Weaver will have to decide whether he should replace his Tesla Model 3 with another electric vehicle once his lease for the car expires. The father of a two-year-old boy lives in a suburban area of Los Angeles with his family and likes to drive an emissions-free vehicle. Due to the fact that it is manufactured in South Korea and Indonesia, he is not able to qualify for the $7,500 tax credit under the new Inflation Reduction Act (IRA) if he wants to purchase the next EV he desires—a $50,000 Hyundai Ioniq 5.

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He is considering renting out a Hyundai Ioniq 5 instead of buying one to save money. Weaver may return to driving a gas guzzler if he wants to save money. In any case, the latter option would allow him to take advantage of the tax credit because, under new federal regulations, leased vehicles are not subject to any restrictions on where they are produced, where their battery materials come from, or how much the consumer earns. This is one of the most important requirements about electric vehicles that would generate an incentive for North American manufacturers to produce battery-powered cars.

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Buying stuff is literally my day job; I'm responsible for figuring out what's best to buy, and how to buy it, and this is horribly complicated. Why is it so hard to decide what to buy and how to buy it? That's the fundamental problem, Weaver says, “EVs are just too expensive, and I don't want to pay through the nose for something that's not worth it.”

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A mere 12 electric vehicles qualify for the full $7,500 tax credit if they are bought by consumers. However, all battery-powered models qualify for it if they are leased, as the IRA considers them a commercial vehicle in those circumstances. If you use the lease option, you are able to drive millions of electric vehicles through the IRA loophole. It was the automakers' fear that they would not be able to access the IRA tax credits intended to stimulate the nascent electric vehicle market in the US that prompted them to lobby for and succeed in securing it.

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There are several favorable factors that will likely lead to leasing being the predominant method of obtaining electric vehicles for Americans. The chief executive officer of Ford Motor Credit, the automaker's loan arm, Marion Harris, anticipates that sixty percent of EV drivers in the United States will lease instead of buy their cars, a figure three times higher than the twenty percent of people who lease internal combustion engine cars. It is Harris's opinion that leasing is a major part of the Inflation Reduction Act, which aims to reduce inflation. Ford Credit will likely be one of the larger supporters of leasing of electric vehicles in the near future, as non-US automakers are going to lease EVs much more in the near future.

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Since December, when the US Department of Treasury opened up the loophole by describing leased electric vehicles as commercial vehicles, the number of EV leasing has been on the rise. It was Choi Sang-mok, South Korea's senior presidential secretary for economic affairs, who said in April that the company's lease and rental car sales, which also count as commercial vehicles, accounted for 28% of Hyundai Motor Co.'s EV sales during the first quarter. According to Edmunds data, in March, the US EV market lease rate increased from 18% to 34%, marking a significant jump from a year earlier.

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In Columbus, Ohio, car dealer Rhett Ricart, who owns dealerships for Ford, General Motors, Hyundai, and other brands, says leasing of electric vehicles is on the rise as a result of the tax credit. Apparently, as consumers become more aware of the opportunity, automotive finance companies are making leases “sweeter” by sweetening them up.

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The leasing process is a no-brainer for consumers, according to Jessica Caldwell, Edmunds' executive director of insights. Rather than waiting to get your money back when you file your taxes next year, leasing allows you to have the credit applied to your monthly payment right away. American's don't get as excited about waiting as they might.

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In spite of his opposition to the leasing loophole, Senator Joe Manchin, a West Virginia Democrat who snubbed the leasing loophole, put restrictions in place to promote domestic production of electric vehicles and batteries in order to prevent the tax credits from becoming subsidies for wealthy car buyers, was very upset. It is clear that the exemption is inconsistent with the intent of the law when it is placed in place because it is in keeping with the wishes of the companies looking for loopholes.

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It was House Speaker Kevin McCarthy who, when he proposed legislation in April to eliminate the tax credits altogether, described them as “green giveaways to companies that distort the market and waste taxpayers’ money,” as having a disdain for Manchin's disdain for them. Although the legislation, which is linked to raising the debt ceiling, is unlikely to pass, it points to Republican opposition to the federal stimulus for electric vehicles.

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Although the case for leasing continues to grow without the IRA, leasing is still a viable option for many consumers. Due to their ability to receive software downloads, electric vehicles are increasing in resale value because of the ability to introduce safety technology or enhance the infotainment features of the digital dashboard. It is certain that you will always find another update to your vehicle that will make it even better, whether it is a driver assistance system or new features, or even extending your range on a charge, according to Harris of Ford Credit. There are also some benefits to subscribing to a lease with a higher resale value -- because, in other words, the car has a higher value at the end of the lease.

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Customers who lease electric cars are also covered by technology insurance if their battery runs flat and cannot charge up when they need to replace it. In the event that a consumer is concerned about the battery and what process is going to be required to dispose of it after buying it, Jeff Schuster, President of the Americas for automotive research firm LMC Automotive, advises that they should consider leasing the battery. As a result, it becomes the responsibility of another person to deal with it."