Lease Buyout Offers Loophole to EV Incentive Restrictions

As we enter the age of the electric car, federal and state governments have created a variety of programs, rebates, and grants to incentivize drivers to make the switch to zero-emission vehicles.

The most significant incentive, outlined in the Inflation Reduction Act of 2022, comes in the form of a $7,500 tax credit for eligible drivers and vehicles. However, there’s a catch.

As with most government incentive programs, there are a lot of rules and restrictions regarding who qualifies for the credit. Household income limits, vehicle price restrictions, assembly locations, and battery component requirements all factor into whether your EV purchase qualifies and how much you can save. In addition, the federal tax credit is nonrefundable, meaning qualified drivers can only use it to reduce their tax liability when they file their taxes but still have to pay the money upfront when they make their purchase.

But there is a way around these regulations—leasing.

How to Get Around Tax Credit Restrictions

In December of 2022, the IRS released a fact sheet stating that EVs that are leased rather than purchased are not subject to foreign assembly restrictions. Two sections of the law, 30D and 45W, detail individual tax credits and commercial tax credits, respectively. All of the restrictions for individuals regarding income, price, assembly, and batteries are outlined in section 30D. However, 45W has no such stipulations.

Individual Tax Credit Requirements

Section 30D states that individual credits only apply to drivers with a household income of less than $150,000 and can only be used toward electric cars that are under $50,000 and electric SUVs, trucks, and vans under $80,000. The vehicles must be assembled in North America, and certain percentages of their battery components and critical battery minerals must be sourced from or manufactured in the U.S or a country that has a free-trade agreement with the U.S.

Commercial Tax Credit Requirements

Section 45W does not include these restrictions. Commercial vehicles can exceed $80,000, be assembled outside North America, and have far fewer battery provisions. Now, you might be thinking, so what? I’m looking to purchase an electric vehicle for myself, not a fleet of commercial EV vehicles for my business. But here’s the good part.

The Leasing Loophole

In the aforementioned fact sheet, the IRS put forth a new interpretation of how leases are categorized, stating that businesses that lease EVs can claim the commercial tax credit for each leased vehicle. So, as long as the vehicle qualifies for the minimal requirements included in section 45W, the lessor can file for the $7,500 tax credit, regardless of whether they are leasing the vehicle to an individual or a business. The lessor can then pass along those savings to the lessee.

That means you can basically lease any EV you want and still get the tax credit, regardless of your income or which electric vehicle you want to drive.

Now, because these tax credits are filed on the backend by dealerships, not every dealer may feel the need to offer corresponding upfront lease discounts. Demand for electric cars has skyrocketed in the last couple of years, and some dealers might not want to pass along the savings if they feel like they can sell or lease their supply of EVs without them.

As a consumer, it’s important to be aware of these potential savings and ask dealerships whether they are incorporated into the lease offer to be sure you are negotiating the best deal possible.

Lease Buyout

Now that you’ve leased the vehicle you want (and gotten a sweet $7,500 discount), it’s time to complete the final step toward owning your new EV.

First off, make sure there is a purchase option in your lease agreement before you sign. Once you’ve negotiated the terms of your lease to your liking and set up your account, you are now ready to buy out the lease and own your vehicle. Here’s how it works.

Before you make your first lease payment, get the buyout price from your lease agreement (i.e. the remaining lease balance). Typically, the price of the buyout will be MSRP + leasing fees + any government fees. You can either pay the cost of the buyout with a cashier’s check for the full amount, or you can finance the buyout with an auto lender like EV Life.

Lease Buyout Process

1. Negotiate your lease (including the $7,500 discount for tax credit).
2. Locate the lease buyout price (remaining balance).
3. Pay the buyout amount and any fees with a cashier’s check, or
4. Finance the buyout with an auto loan.

Some dealerships may be unfamiliar with this unconventional process and may even try to get you to wait a few months for their lease commissions to go through, but don’t be deterred. There is absolutely nothing in any standard lease contract that says you can’t buy out your lease right away.

Besides, as more people figure out this workaround, dealers will soon be seeing more EV customers utilize this system to maximize available incentives and savings.

How EV Life Helps You Save on Driving Electric

At EV Life, we’re on a mission to make it easier and more affordable for anyone to save on driving electric–including you!

With a free EV Life account we help you:

1. Maximize your tax credits and rebates. We prequalify your incentives up front and help you apply for all your incentives pre- and post-purchase with our easy-to-use “Turbo Tax-style” incentive filing tools.
2. Prequalify for low rate EV loans. Based on the EV you want and your credit score, score a prequalified loan offer that beats traditional loan payments.
3. Bundle charging. EV Life can also help you get an instant quote for a home charger + installation – and you can even bundle it into your EV loan.

Open a free account today and start saving on your EV.