Tax loophole in Inflation Reduction Act encourages leasing

Dave Walters of Orange County, California stands by his newly leased Hyundai Ioniq 5 electric vehicle.

Provided by Dave Walters

Fed up with high gas prices and lured by federal tax breaks, Dave Walters decided to buy an all-electric Hyundai Ioniq 5 for his next vehicle.

The Orange County, California resident initially considered buying a used model until learning he could lease the vehicle and take advantage of a key loophole in the Inflation Reduction Act.

Buying a used Ioniq made in South Korea and Indonesia wouldn’t earn him a $7,500 rebate through a federal tax credit. The vehicle would be leased.

“I ran through the numbers – what it would be without the lease loan and with the lease loan – and it kind of overdid me and that was the main reason I went in that direction,” he said. “It was a few hundred dollars less a month.”

Walters is exactly the type of consumer Hyundai engine and other automakers have begun hiring electric car leases to take advantage of a loophole in the IRA that allows vehicles manufactured outside of North America to qualify for the credits. It’s something lawmakers like U.S. Senator Joe Manchin, DW.V., wanted to block with the rules.

Under the IRA, leasing is categorized as It is a commercial business and is therefore exempt from regulations requiring the vehicle and battery components to be manufactured in North America. Most electric vehicles for sale today are not eligible for the full tax credit due to where the vehicles or components were manufactured.

Senator Joe Manchin, DW.V., speaks with other members of the House of Representatives before a joint session of Congress in the U.S. Capitol in Washington April 27, 2023.

Elizabeth Franz | Reuters

But leasing could save motorists thousands, as long as the companies that get the loans pass the savings on to consumers.

“I’m not surprised manufacturers are saying they will offer more leasing,” said Charlie Chesbrough, chief economist at Cox Automotive. “For the IRA to use electric vehicles and allow them to qualify for the $7,500 is truly a game changer and it has a huge impact on our monthly payment.”

Chesbrough estimates that the full $7,500 tax credit for a $50,000 electric vehicle and a 36-month lease equates to a monthly savings of $222 for a consumer.

Auto research firm Edmunds reports that about 37% of electric vehicles purchased in April were leased, up from 25% in the first quarter and 13% last year.

“It kind of creates a loophole for automakers to target more affluent customers who are more likely to be able to afford an EV and actually get approval to buy it,” said Jessica Caldwell, Executive Director of Insights at Edmunds. “It also allows them to level the playing field against the competition, which gets the full tax credit on purchase.”

According to Hyundai Motor America CEO Randy Parker, the percentage of Hyundai Ioniq 5 vehicles leased rose from about 2% earlier this year to over 30% in April. As of this month, the company is offering to lease the vehicle for $499 per month — less than the industry average lease rate of $577, according to Edmunds.

The Kia EV6 will be on display at the April 13, 2022 New York Auto Show.

Scott Mill | CNBC

“We want to continue to push and highlight leasing as much as we can so that we can continue to benefit from the tax credit and consumers can benefit from the tax credit,” Parker told CNBC. “Right now, that’s how the cards are dealt.”

Kia and Ford also say they will look to increase leasing of their electric vehicles to lower prices and increase sales.

Kia expects to increase its leasing share of electric vehicles from under 15% currently to as much as 40% in the coming months, Watson said. Like Hyundai, Kia is offering its EV6 on a $499 lease with a $4,999 down payment.

“Over the next few years, Kia will have to rely heavily on leasing to pass the $7,500 credit on to customers. And that’s what we want to do,” said Eric Watson, vice president of sales operations for Kia Americas.

Prior to the IRA’s passage, Hyundai and Kia, owned by the same South Korean parent company, were second only to Tesla in US electric vehicle sales. But their sales have since lagged behind those of General Motors and Ford, both of which have vehicles that are eligible for some or all of the federal tax credits.

Hyundai and other automakers that were no longer eligible for loans under the IRA opposed the rules, calling for a longer relaxation period for the new rules or broad exemptions based on their U.S. electric-vehicle plans.

“It gives us a lifeline. I wouldn’t call it a level playing field,” Watson said of the lease eligibility for the $7,500 tax credit.

President Joe Biden stands next to a Ford Mustang Mach-E SUV during a visit to the Detroit Auto Show to highlight manufacturing of electric vehicles in America September 14, 2022.

Kevin Lamarque | Reuters

A Ford spokesman said the company’s credit department is working on a leasing strategy for electric vehicles like the Mustang Mach-E, which is made in Mexico and is currently eligible for half the federal tax credit if purchased. The company’s electric Ford F-150 Lightning is eligible for the full $7,500.

“We’re going to be leasing electric vehicles and you’ll be hearing more about that from us soon,” Ford CFO John Lawler said last month.

A spokesman for GM said the company is not changing its electric vehicle leasing strategy because all of its vehicles are eligible for the full tax credit. Only about 3% of GM’s electric vehicles are leased, he said.

While lease terms are typically only a few years, automakers have touted that electric vehicles are attracting new customers to their brands.

“I think the sooner you get these customers on to your brand, especially with the new technology, the better chance you have of retaining them,” Edmunds’ Caldwell said.

And term leasing could be an attractive option for many consumers like Walters, who traded in a Nissan Murano in 2009, as electric vehicles remain an emerging industry with changing technologies and a significant number of new entrants.

“I wanted to check it out and see if I really liked it. It’s only been six weeks but so far it’s been really good.” said Walters. “It’s really fun to drive and I really enjoy not having to pay for gas.”