Tax credit workaround spurs EV leasing

There was a surge in EV leasing this summer, accounting for 26 percent of all EV transactions in July — up dramatically from 7 percent in December, J.D. Power data shows.

But counterintuitively, the brands experiencing an explosion in leasing are the ones ineligible for the U.S. government's Clean Vehicle Credit incentive.

EV lease rates in June for Volvo, Mercedes-Benz, Audi and Kia, which don't qualify for the purchase credit, ranged from 60 to 82 percent, J.D. Power data shows. However, Tesla, with its Model 3 and Model Y qualifying for the purchase credit, has an overall lease rate of about 8 percent.

The federal Clean Vehicle Credit, most recently modified in April, offers EV, plug-in hybrid and fuel cell EV buyers a maximum tax credit of $7,500 for vehicles that meet qualifying standards based on final assembly location, battery component and critical minerals sourcing, and consumers' modified adjusted gross income. Automakers already producing and sourcing battery minerals in the U.S. have the advantage, as the April changes were unwelcome news to automakers whose EVs no longer qualified to receive the $7,500 credit.

To get around this roadblock for EVs that don't qualify for that credit, automakers and dealers are using the Commercial Clean Vehicle Credit, which allows lessors to pass along the $7,500 in a lease, which is considered a commercial transaction. That can translate to a reduction in a lease payment of at least $200 a month (for a 36-month lease), said Elizabeth Krear, vice president of J.D. Power's electric vehicle practice.

"We have seen the lease mix for BEVs rise this year as a result of the [Commercial Clean Vehicle Credit] incentive pass-through for lease," she said.

Kia America's EV6 and Niro electric crossovers do not qualify for the Clean Vehicle Credit. Eric Watson, vice president of sales for Kia America, said the automaker since April started passing the full $7,500 savings to customers via leasing.

"It took us a little while before we kind of understood all those rules and regulations and how to go forward, and we've actually seen a pretty significant change in our business," Watson said.

For example, just more than half of Kia's EV6 customers are leasing, up significantly from about 5 percent last year, he said. The Niro had a similar increase in lease customers, up to about 50 percent from about 10 percent before the Inflation Reduction Act.

As leasing declined industrywide during the COVID-19 pandemic, Kia retrained dealers on how to present a lease and its value to customers. EVs at Kia dealerships have stickers that urge shoppers to ask how they can qualify for the $7,500 credit.

"We are pushing a lot of educational materials out for the dealers and the customers," Watson said.

But not all customers want to or are able to lease, he pointed out. So Kia is offering a one-pay plan allowing EV customers to pay upfront for a 24- or 36-month lease and still capture the tax credit.

"We're making a variety of programs available for customers to capture that tax credit," he said.

Since Kia started implementing the $7,500 tax credit into leasing in April, its EV deliveries have nearly doubled but still remain slightly less than 2022 levels.

Watson said he doesn't anticipate any change in the tax credit legislation.

"We are actively asking our dealers and working through both state and federal governments to make them aware of what's happening in the automotive industry and how the legislation is impacting EV sales and the ability for people to freely choose," Watson said.

Rita Case, CEO of Rick Case Automotive Group, in Sunrise, Fla., sells Acura, Audi, Genesis, Honda, Hyundai, Kia, Mazda and Volkswagen. Of the brands sold, only Volkswagen is listed on the fueleconomy.gov website as qualifying for the EV purchase credit.

Case's dealership group traditionally leases 55 to 65 percent of all the models it sells.

With the help of manufacturers' aggressive incentives, including subvented deals, shorter 24- and 36-month leases and the tax credit passed through from the captive finance companies her stores work with, those EV penetrations have skyrocketed.

In August, 78 percent of her Hyundai Ioniqs were leased, 92 percent of her Volkswagen ID4s and 78 percent of her Kia EV6s. Rick Case Automotive, with 26,213 new vehicles sold in 2022, is No. 22 on Automotive News' list of the top 150 dealership groups.

"If we lease, we get to use the $7,500 credit, which brings the [EVs] more in line with payments that would be comparable to a 60-month payment of [an internal combustion engine] car," Case said.

As EV inventory increases on dealer lots, manufacturers and dealers are looking for ways to make them more affordable for consumers, she said.

"There's a lot of people that want to try an EV and they want [to help] the environment, but the bottom line is the payment is driving the purchase," Case said. "If we can get the payment more in line with a traditional vehicle, customers are going to give it some consideration. By using the $7,500 credit, by having this loophole, is why the leasing is going up."

Leveraging the current tax credit structure is helping Nissan U.S. put customers into its Leaf and Ariya EVs, said Ted Kreder, senior manager of EV sales and strategy for Nissan U.S. Kreder said he's seen EV leasing rise since April, noting the leasing pass-through is helping customers who may be somewhat tentative about EVs to lease instead of purchase.

Nissan's EV lease penetration is on pace with the market in the 40 to 50 percent range, Kreder said. He said the automaker expects that rate to remain steady, if not grow slightly.

"So many lease customers are leasing for high value and with a focus on their monthly payment," Kreder said. "At the end of the day, that's where we want to make sure we're most competitive — whether it's through a discount, through an IRA tax credit or through the way we're able to structure the offer to take advantage of that IRA tax credit and make sure that the customer is receiving the best benefit."

Some states, such as Colorado, offer significant state incentives for EVs, he added.

"We've seen success there as well where we can take advantage of state incentives on the lease or purchase side," Kreder said.

Damon Lester, dealer principal of Nissan of Bowie, in Maryland, and vice chairman of the National Association of Minority Automobile Dealers, said leasing helps make EVs more affordable. But to put even more customers in EVs, the association's leadership is talking with lawmakers on Capitol Hill on making some changes.

"Within the next eight years, there has to be a significant market incentive in order to get people to want to purchase these vehicles," Lester said. "One of the things we have been discussing is a two year-moratorium on the [tax credit] formula, which is currently based on income for the $7,500 credit, for it to be available for all makes, for all models, for all vehicles."

That would give all customers, regardless of income, access to the full tax credit, similar to what they could take advantage of during the COVID-19 pandemic, he said.

"The electric vehicle has to be an essential vehicle in the next eight to 10 years for consumers to drive as their daily," Lester said. "That type of credit still needs to be accessible to everyone."

Lester said consumers would rather hear they have $7,500 off the purchase price of an EV instead of a $7,500 lease credit.

"It's a wordsmith and mindset from a consumer standpoint," Lester said. "It does and can deter them because we've been so accustomed over the past three or five years of hearing, 'You buy an electric car, we're going to give you $7500 off.' "