There are barriers an electric vehicle must pass in order to qualify for the full-slate of purchase-related tax credits provided by the Inflation Reduction Act. That said, buyers and automakers alike have located a loophole in the IRA that allows for some serious savings on vehicles that don’t explicitly qualify under the current restrictions. That loophole is centered around leasing and the commercial business exemptions built into the law.
Most electric vehicles on sale in the United States today do not qualify for the full $7500 tax credit provided to buyers by the IRA for their purchase of an EV. That is the result of specific criteria laid out for automakers in the law, which include regulations regarding where a vehicle is built. In order to receive the full credit, an EV or PHEV must be built in the United States, or by our partners in Canada or Mexico. A vehicle must also contain an increasing percentage of battery materials sourced from the U.S. or an approved trade partner. The batteries and their components also need to largely be assembled in the United States or North America to qualify for the full credit. There are currently no EVs or PHEVs produced by a foreign automaker that qualify for the $7500 tax credit after purchase. GM is the only automaker whose entire sub-$80,000 EV lineup meets IRA requirements.
The impact of these tax credits on buyer behavior are very real. Prior to the stringent IRA requirements, Hyundai and Kia ranked just behind Tesla as the second highest seller of EVs by volume in the United States. Under the current requirement and credit system, both Ford and GM have managed to surpass their South Korean competitor Stateside.
With the average EV already a more expensive item than a traditional gasoline-powered car, these limits on tax credits have significantly limited the purchasing power many buyers have. That said, similar limitations on material sourcing and construction are not placed on vehicles that are leased. That’s because the IRA views leases as commercial business endeavors, which are exempt from law completely. This oversight seemingly allows buyers to side-step other restrictions involved with the IRA as well, including household income limits on tax credits. According to the New York Times, leasing companies receive tax credits for EVs even if the aforementioned requirements are not met, and can choose to pass those savings onto customers. This loophole has started to push automakers currently left off the tax credit list towards incentivized leasing practices.
The reality brought on by this EV tax credit loophole is already in full swing. Hyundai Motor America CEO Randy Parker told CNBC that the number of Ioniq 5 vehicles under lease reached more than 30 percent as of April 2023. That figure was only around 2 percent at the start of the year, despite the Ioniq 5’s impressive segment performance. Hyundai isn’t alone either, as the number of EV sales on lease terms have jumped 25 percent since Q1, up to 37 percent overall according to Edmunds. Both Hyundai and Kia are currently offering $499 lease deals on some of the popular EV Ioniq 5 and EV6 siblings.
The core ideas behind the Inflation Reduction Act’s EV tax credits make a lot of sense. We’re trying to reduce our fossil fuel usage while creating jobs and reducing our dependence on adversarial nations like China and Russia. That said, the timeline related to the rollout of the restrictions has left EV customers with very few options for the time being. Automakers need time to bring new facilities online across the United States, but they are coming. Pushing people into extended financing options doesn’t seem like a solution to the larger problem at hand, particularly in a volatile financial market. That said, leasing might be your best chance at scoring the EV you actually want at a decent price. Whether or not the loophole stays in place moving forward is a matter of discussion best left for congress.
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