Leased and Used Electric Vehicles Now Qualify for Federal Tax Credits

The U.S. Department of Treasury’s gift to electric-vehicle shoppers (and global automakers) for the new year was to make many more EVs and plug-in hybrids eligible for the federal tax subsidy of up to $7,500 — including vehicles built outside North America — as long as drivers lease them or buy used rather than buy new.

Related: What to Know Before Purchasing an Electric Vehicle: A Buying Guide

A revised federal credit program signed into law in August 2022 includes three categories for EV credits and took effect Jan. 1.

• One category extends the former credit of up to $7,500 for consumers buying new EVs and PHEVs, but it puts new limits on vehicle price and buyer income and will soon add requirements for the sourcing of EV batteries and materials. Additionally, since August, it has required that the vehicles be assembled in North America.
• A second is a new credit of up to $4,000 for buyers of used EVs.
• A third is a “commercial” credit for businesses acquiring EVs. It offers up to $7,500 for light-duty vehicles (under 14,000 pounds) and up to $40,000 for heavier vehicles. Significantly, the commercial credit does not have the origin, price or other restrictions of the credit for consumer buyers.

On top of all that, the Department of Treasury guidance released at the end of December allows the less restrictive commercial credit to also apply to vehicles leased by consumers; that means most plug-in and fuel-cell EVs currently on the market can qualify, including those built in Europe or Asia. The credit goes to the leasing company — the vehicle owner — but it can be passed to the consumer in the form of lower lease payments.

The new federal rules do not affect state and local subsidies available for EV buyers.

Win for Global Automakers

Automakers in Europe, South Korea and Japan — who currently build many EVs in their home countries — had loudly complained about the new law’s restrictions on the EV purchase credit, which were imposed to help promote North American production. The companies lobbied for their leasing units to be allowed to get the commercial credit. The decision to allow that is a win for those automakers, though the impact remains to be seen — the leasing rate for new EVs was about 10% in the third quarter of 2022 versus 18% for all vehicles, according to data tracker Experian.

Not all automakers supported the leasing exception, including GM, Tesla and Toyota. U.S. Sen. Joe Manchin, D-W.Va., a major proponent of the new law’s North American production rules, said the decision “bends to the desires of the companies looking for loopholes and is clearly inconsistent with the intent of the law.”

Rules for Buyers of New EVs Remain

The decision on leased vehicles does not loosen 2023’s ramped-up restrictions on the tax credits for individuals buying new EVs and PHEVs. They were aimed to encourage sales of less expensive EVs to less wealthy buyers, to bring more production to North America, and to shift battery supply chains here or at least to countries with which the U.S. has free-trade agreements. The law also lifted the automaker sales cap on Jan. 1, so Tesla and GM vehicles again qualify. The IRS has posted an updated list of qualifying automakers and vehicles.

The new eligibility rules include:

• New vehicles must be assembled in North America. The build location can be confirmed through the EV’s vehicle identification number and the Department of Energy’s VIN lookup tool.
• Battery capacity must be at least 7 kilowatt-hours.
• Gross vehicle weight rating must be less than 14,000 pounds.
• The sticker prices for new EVs cannot exceed $80,000 for SUVs, vans and trucks or $55,000 for cars. The IRS’s list includes the price cap for each vehicle.
• Buyers of new vehicles cannot have incomes exceeding $150,000 for single people, $225,000 for heads of households and $300,000 for married couples filing jointly.
• New rules, which have been delayed until March, will tie eligibility for the credit to the sourcing of batteries and their materials. Half of the credit ($3,750) will be based on the share of battery components produced or assembled in North America and the other half on the share of the battery’s key minerals (such as lithium) sourced or recycled in North America or in a country with a U.S. free-trade deal. The minimum share requirements will ratchet up over the 10 years of the new credit program.

The New Used EV Credit

Purchases of used EVs and PHEVs after Jan. 1 are now eligible for a tax credit of 30% of the sale price, up to a maximum of $4,000. The credit also has restrictions, though fewer than for new vehicles. The IRS has posted a list of vehicles that qualify, and the rules for the credit include:

• Battery capacity must be at least 7 kilowatt-hours.
• Gross vehicle weight rating must be less than 14,000 pounds.
• The used EV must be bought from a dealer.
• The sale price must not exceed $25,000.
• The vehicle’s model year must be at least two years earlier than the calendar year of the purchase (For example, a model year of 2021 or older if purchased in 2023).
• The credit is only for the first resale of the vehicle.
• Buyers cannot have income exceeding $75,000 for single people, $112,500 for heads of households and $150,000 for married couples.
• Buyers cannot be a dependent on another person’s tax return.
• The buyer can claim the used EV credit only once in three years.

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