DETROIT — With a government push, leasing an electric vehicle is becoming the most affordable option, rather than buying one.
Last year’s Control Inflation Act provided a federal tax credit of up to $7,500 that could be used for EVs. Under this rule, dealers can apply their credits to leased electric vehicles to reduce their customers’ monthly payments, regardless of where they are manufactured.
Not so for those who buy EVs.
For buyers, only EVs manufactured in North America are eligible for the full tax credit. And of the 49 electric vehicles sold in the US this year, only 10 will meet that requirement. Still, for the buyer to receive the full $7,500 credit, the EV must contain a percentage of battery components from the US or countries with which it has trade agreements.
Why distinguish between leased and purchased vehicles?
When creating the tax credit, Congress classified EVs that were leased rather than purchased as “commercial” vehicles, according to the Treasury Department. Under this law, commercial vehicles are exempt from North American manufacturing and battery content requirements. As a result, leaseholders will now enjoy a wider selection of EVs covered by her $7,500 credit.
“The affordability of leasing has outpaced the affordability of buying,” said Elizabeth Clare, vice president of EV operations at J.D. Power, in the J.D. Power Index, which includes total cost of ownership.
Many consumers have noticed the difference and are taking advantage of it. In April, leasing accounted for 41% of all EV deliveries in the U.S., four times more than in December before the new rules took effect, Mr. Clare said.
Jeff Pohanka, president of 21 Dealer Groups in Maryland, Virginia and Texas, said he expects an increase in lease volume. He predicts that buyers will increasingly recognize that tax credits can make up for the generally significant cost difference between EVs and similar gasoline vehicles.
“It definitely makes sense,” he said. “If the affordability issue narrows between gasoline and electric vehicles, incentives could move the market.”
The Pohanka group, which sells cars from multiple automakers, said tax credits were just beginning to bring down leasing costs. Still, the rules governing credit are so complex that some buyers seem unsure if they are eligible for credit. This regulation does more than just distinguish between leased and purchased vehicles. It also includes income criteria that disqualify some buyers.
To be eligible for the tax credit, the value of your car cannot exceed $55,000. SUVs, pickups and vans he cannot exceed $80,000. Also, the total income of the buyer must not exceed $150,000 if he is single, $300,000 if he applies jointly, and $225,000 if he is head of household. .
Pohanka said some EVs have been sitting on dealer premises longer than usual, given he’s noticed confusion among customers over tax credit eligibility.
“I think this disruption is having a very negative effect on the momentum of electric vehicles,” he says.
Critics, including some members of the Capitol, say they view Treasury Department rules that allow full tax credits for many EVs leased rather than purchased as an unfair loophole. They argue that it will benefit automakers that build all their vehicles overseas and have yet to build EV and battery factories in the United States. These foreign makers can focus on leasing EVs in the U.S. at the expense of domestic automakers, he said.
Senator Joe Manchin, a West Virginia Democrat and principal author of the text on the tax credit, wanted a North American manufacturing requirement that would help boost U.S. manufacturing jobs. He included battery requirements to encourage companies to build domestic EV supply chains. But Manchin argues that the Biden administration is circumventing the intent of the law by allowing tax credits for foreign-manufactured cars.
“The U.S. administration continues to ignore the purpose of the law to bring manufacturing back to the United States and ensure a reliable and secure supply chain,” he said in a statement.
Foreign auto makers have complained that they are excluding them from tax credits for buyers, even though they are building battery plants and assembly plants in the United States as intended by the bill.
The Treasury Department denies creating a loophole, arguing that it was Congress that waived commercial vehicle manufacturing and battery requirements. When a dealer buys a car and leases it to someone, it becomes a commercial transaction. The dealer or finance company receives tax credits and retains ownership of the vehicle.
“Commercial vehicle credits are a straightforward interpretation of the anti-inflation law congressional authored and apply long-standing tax laws on leased assets,” spokeswoman Ashley Chapitol said in a statement. rice field. “There was no room for Treasury interpretation.”
Hyundai Motor, which owns three EV models manufactured in South Korea and sold in the United States, is one of the beneficiaries of the lease terms. A spokeswoman for the South Korean automaker said 30% of EVs delivered in the U.S. between January and March were lease equivalents. By 2022, that proportion will be just 5%.
The average monthly cost of ownership for a three-year leased EV has dropped $403 since December, largely due to tax credits, according to JD Power. In contrast, buying an EV with 5 years of financing reduced the average monthly cost by just $118.
Hyundai is offering to lease the rear-wheel-drive EV Ioniq 5 SE for $499 a month for three years, but customers will have to pay a down payment of nearly $4,000. Buying the same EV would cost $865 a month for five years at an average new-car loan rate of 7%.
Leasing may be cheaper, but it doesn’t fit everyone’s financial plans. Unlike a purchase, paying off the loan doesn’t end your monthly payments.
Experts also point out that even if everyone who leases an electric vehicle is eligible for the tax credit, it doesn’t. Automakers and dealers can decide whether to apply tax credits to their customers. You don’t have to.
Clare said some companies are giving away $7,500 of credit in full to eligible consumers, thereby reducing their monthly payments. Others tell only part of it.
Ultimately, buying an EV may cost less than leasing in the long run as automakers make adjustments to comply with North American manufacturing and battery configuration requirements, but that’s not the case. Clare said there are too many variables to predict when the outbreak will occur.
“It will be a different playing field then,” she said.
