Want to Lease an EV? The Tax Credit 'Loophole' for That Is Going Away Soon

The number of people leasing an EV has grown in recent years.

Data show that a little over 40% of electric vehicles were leased overall last April, up significantly compared to the previous year, according to Edmunds.

While there are many reasons why drivers opt to leave vs. buy a vehicle, that boost in electric car leases could be partly due to a federal EV lease tax credit “loophole” in the Inflation Reduction Act (IRA).

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The IRA is climate legislation enacted in 2022 by the Biden administration. The law contains billions of dollars in clean energy tax incentives, including an up to $7,500 EV tax credit for eligible buyers and qualifying new and used "clean vehicles."

Those incentives were designed to help boost EV adoption by making the cars more affordable for more people.

But now that Donald Trump has enacted major tax reform dubbed the "One Big, Beautiful Bill" (OBBB), many clean energy tax breaks, including the EV tax credit and what some call the EV lease loophole, are being eliminated.

So, are you in the market for a new electric vehicle? If so, here’s some key tax information that might help you decide whether to buy or lease an EV.

More from Kiplinger: How the EV Tax Credit Works

Do you get the federal EV tax credit if you lease an EV?

• There is still (until later this fall) a tax credit available for leased electric vehicles.
• There’s also a catch: The tax credit belongs to the lessor, not to you, the lessee.
• AND...the incentive is being eliminated under Trump's new tax bill.

Qualified buyers who meet certain income limits can receive a federal tax credit of up to $7,500 for purchasing qualifying "clean vehicles."

There is also a tax credit available for eligible used clean vehicles of up to $4,000.

However, strict eligibility requirements have meant that not all electric vehicles qualify for the full federal credit amount, and not all buyers qualify due to income limits for the credit.

EV lease tax credit loophole

That’s where the so-called “EV lease loophole” has come in.

Under the IRA, leased electric vehicles have been classified as "commercial vehicles," making them eligible for the full federal clean vehicle credit without meeting strict battery and sourcing requirements.

So, you could have a wider selection of electric vehicles to save money if the dealer agrees to pass the tax credit savings on to you.

However, remember that the dealer receives the tax credit (not you).

Any savings you receive would be in the form of a rebate or reduced lease price. (And some dealers won't pass on the credit savings.)

There is another potential tax-related advantage to leasing an electric vehicle.

You don't have to worry about your income affecting your eligibility for the credit.

Since the dealer holds the tax credit, income limits for the EV tax credit don’t, at this time, apply as they do when you purchase an electric vehicle and want to claim the tax credit.

More from Kiplinger: 'Instant' EV Tax Credits Are a Hit

Leasing vs. buying an electric vehicle

Even when tax incentives aren't involved, deciding whether to buy or lease a car is a key decision for many shoppers. Some people won't save money leasing a car, and others don't like the mileage limitations involved.

But some potential benefits of leasing a vehicle include:

• Typically lower monthly payments
• A generally lower down payment
• Warranty coverage
• Access to a selection of newer cars
• Ability to walk away after the lease term ends and you’ve satisfied your lease obligations

However, leasing an electric vehicle has the previously mentioned added benefit of tax credit eligibility.

(Because the lessor “owns” the credit, you don’t have to worry about claiming the electric vehicle tax credit on your federal return or not qualifying for the credit due to income limits.)

Also, if the dealer passes on the savings from the tax credit to you, your monthly lease payments might be lower because of the discount.

EV lease deals: Are EVs affordable?

High car prices — not just for electric vehicles but for traditional automobiles — are another reason why an EV lease is an attractive option for some buyers.

Recognizing this, some industry manufacturers have reduced starting prices on popular EV models.

Some of those price cuts made various models and versions eligible for the full $7,500 federal EV tax credit.

And when those price cuts are combined with federal and state EV tax incentives, buyers can get certain electric vehicles at significant discounts.

Note: Several states offer electric vehicle tax incentives (this interactive site from the Alternative Fuels Data Center lists some), and the amounts and eligibility rules vary.

Some manufacturers lure consumers who may want to lease an EV with advertisements for "lease cash," a "lease credit," or an "EV lease bonus."

These, and other terms like the "hybrid/electric federal tax credit," essentially refer to the EV tax credit that can, as mentioned, reduce the cost of an EV lease.

EV price cuts and state and federal tax incentives could also incentivize people who want to buy an electric vehicle.

But remember that some state EV tax credits may or may not apply to leases, and each state tax credit has its own rules and restrictions.

And...if that didn’t make your lease vs. buy decision harder, as of last year, eligible buyers have been able to take the federal EV Tax credit at the point of sale on qualifying electric vehicles rather than as a traditional tax credit at tax time.

When is the EV lease loophole going away?

Starting after September 30, 2025, the so-called "lease loophole" related to the federal EV tax credit will close.

New provisions in the OBBB accelerate the phase-out of all federal EV tax incentives, including those available through leasing. So, after September 30, neither lessees nor purchasers who haven't already taken possession of eligible vehicles will be able to claim a credit.

What does this mean for you? If you were planning to lease an electric vehicle, registered dealers should still be able to pass on the federal tax break.

After the fall deadline, however, the up to $7,500 federal incentive goes away, which could push lease prices higher if automakers don't step in with new offers.

More on EV Tax Credits

• How the EV Tax Credit Works for 2025: Yes, It's Ending Soon
• The Federal EV Charger Tax Credit: What to Know
• Electric Car Owners Can't Avoid Road Taxes