Inflation Reduction Act tax credit loophole boosts leasing

Tired of high gas prices and tempted by federal tax breaks, Dave Walters decided he wanted an all-electric Hyundai Ioniq 5 for his next car.

The Orange County, Calif., resident initially considered purchasing a used model, until he learned that he could lease the car and take advantage of a major loophole under the Inflation Reduction Act.

Buying a used Ioniq, which is produced in South Korea and Indonesia, won’t net him $7,500 in a federal tax credit. I’ll rent the car.

“I ran the numbers – what would it be without leasing credit, leasing credit – and that kind of got me on top and that was the main thing that got me in that direction,” he said. “It was less than a few hundred dollars a month.”

Walters is exactly the type of consumer Hyundai Motor And other automakers have begun targeting EV leases to take advantage of a loophole in the IRA that allows vehicles produced outside North America to qualify for the credits. It’s something legislators like US Senator Joe Manchin, DW.V.intended to ban rules.

Under an IRA, leasing is classified as business and are thus exempt from regulations requiring vehicle and battery components to be manufactured in North America. Most of the electric cars on sale today do not qualify For the full tax credit due to where the vehicles or components were manufactured.

But leasing can save drivers thousands, as long as the companies that take out the credits pass the savings on to consumers.

“I’m not surprised manufacturers say they’re going to offer more leasing,” said Charlie Chesebrough, chief economist for Cox Automotive. “Using IRAs on electric vehicles and allowing them to qualify for $7,500 is really a game-changer, and that has a huge impact on our monthly payments.”

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

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

“It kind of creates a loophole for automakers to target wealthier customers who are more likely to be able to afford and actually get approved to buy an electric car,” said Jessica Caldwell, CEO of Insights in Edmonds. “It also allows them to level the playing field against competitors who get the full tax credit on the purchase.”

The percentage of Hyundai Ioniq 5 rentals has increased from about 2% to start this year to more than 30% in April, according to Hyundai Motor America CEO Randy Parker. Starting this month, the company is offering a $499-per-month lease deal for the car—less than the industry average lease payment of $577, according to Edmunds.

“We want to continue to pay rent and highlight it 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. “Now, this is how the cards were dealt.”

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

Watson said Kia expects electric car rentals to increase from less than 15% now to 40% in the coming months. Like Hyundai, Kia is offering a $499 leasing deal for its EV6 with a down payment of $4,999.

“Over the next several years, Kia is going to have to lean heavily on leasing in order to be able to pass that $7,500 of credit on to customers. And that’s what we intend to do,” said Eric Watson, Kia’s vice president of sales operations. America.

Before the IRA passed, Hyundai and Kia, which are owned by the same South Korean parent company, were second in the United States in electric vehicle sales after Tesla. But their sales have since fallen short of those of general motors and Ford, both of which have vehicles that qualify in whole or in part for federal tax credits.

Hyundai and other automakers that become ineligible for credits under the IRA have opposed the regulations, seeking a longer respite for the new rules or broad exemptions based on US EV plans.

“It gives us a lifeline,” Watson said of the $7,500 tax credit-eligible rental. “I wouldn’t call it leveling the playing field.”

A Ford spokesperson said the company’s credit arm is working on a strategy to lease electric vehicles like the Mustang Mach-E, which are produced in Mexico and currently qualify for half of the federal tax credits if purchased. The company’s Ford F-150 Lightning electric car is eligible for the full $7,500.

“We’re going to lease electric cars, and you’ll hear more about that from us soon,” John Lawler, Ford’s chief financial officer, said last month.

A GM spokesperson said the company is not changing its leasing strategy for electric vehicles, as all of its vehicles qualify for full tax credits. Only about 3% of GM vehicles are leased, he said.

While lease terms are usually only a few years, automakers have described electric vehicles as attracting new customers to their brands.

“The earlier you get these customers within your brand, especially with new technology, I think the better you have to retain them,” said Caldwell of Edmunds.

And temporary leasing may be an attractive option for many consumers like Walters, who traded in a 2009 Nissan Murano, as electric vehicles remain an emerging industry with changing technologies and a plethora of new inputs.

“I wanted to kind of dive my toe into it and see if I really liked it. It’s only been six weeks but it’s been really good so far,” Walters said. “I really enjoy driving it and really enjoy not having to pay for gas.”