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EV tax credit for consumer leases a ‘positive development for industry’

The Treasury Department and the IRS issued some new guidelines on the Inflation Reduction Act’s (IRA) EV tax credit, and for the time being it is bringing foreign automakers — and U.S. consumers — some good news ahead of the new year.

Recall that the consumer tax credit for EVs as outlined in the IRA required (1) vehicles to be below a certain price ($55,000 for cars, $80,000 for SUVs and pickups), (2) buyers' income to be $300K in adjusted gross income or below for joint filers and $150K for single filers, (3) a percentage of critical battery materials and battery assembly to be U.S. based, and (4) final assembly of the vehicle to take place in North America.

It is that last requirement that has tripped up foreign automakers for obvious reasons. However, new guidance from the IRS details that leasing EVs, which falls under the commercial EV credit of the law (known as 45W credit for commercial clean vehicles) could offer a loophole.

The commercial clean vehicles portion of the law doesn’t require North American assembly or income requirements for that matter. In the new guidance released by the IRS, the agency essentially said a taxpayer that leases a clean vehicle to customers is eligible to claim the commercial EV credit.

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In this case, the “taxpayer” could be the financing arm of an automaker or a bank the dealer works with (or dealer itself who provides financing), who originates the lease would take the $7,500 credit, but then would pass on the savings to the lessee, or consumer, in the form of reduced lease payments.

The Alliance for Automotive Innovation (AAI), a trade group backed by a number of automakers, sees the new guidance by Treasury and the IRS as a positive development.

"Finally, the Treasury Department issued guidance clarifying the $7,500 credit for EVs acquired via a lease – aka the 45W credit for commercial clean vehicles,” said John Bozzela, president of the AAI. “That’s consistent with our recommendation and a positive development for broad adoption of EVs in the U.S. as production and supply chains localize – a goal industry and policymakers share."

However, Senator Joe Manchin (D-WV), who was instrumental in crafting the IRA’s EV tax credit regime and securing passage of the legislation in general is not happy about the IRS’s interpretation of the commercial EV credit for consumer lease purposes. Manchin believes this interpretation of lease provision is a means for foreign automakers to benefit from a law that was designed to encourage North American manufacturing.

Yahoo Finance reached out to a number of foreign and domestic automakers to get their response to the new EV lease guidelines. While a few automakers who responded are still reviewing the guidelines (Hyundai, Toyota, BMW, Polestar), and others refer back to the AAI statement (Honda, Porsche), a couple automakers did directly respond. It should be noted that many automakers' corporate offices are closed during the holiday period and have not been able to respond back to Yahoo Finance requests for comment.

GM

"Tax credits are a proven accelerator of electric vehicle adoption and we are excited that qualifying customers will be able to take advantage of our eligible EVs."

Fisker Inc.

“Fisker supports any effort by the U.S. government to make EV ownership more attractive to consumers – and that accelerates our transition away from ICE vehicles. Fisker is actively exploring US assembly of the Fisker Ocean SUV, and we intend to manufacture our next vehicle, the Fisker PEAR urban lifestyle vehicle, in Ohio.”

Mercedes-Benz

“There are four discrete limitations (1) Mineral sourcing from certain countries, (2) Final assembly in North America, (3) Household income limitation, (4) MSRP in the Inflation Reduction Act that are individually and collectively challenging for the industry in general and also for Mercedes-Benz in the near-term. Independent of this legislation, we were already strengthening our global supply and production networks to support the transition to a fully electric future. We are reviewing the new guidance issued by the Treasury today (12/29/22) and the anticipated additional regulations over the coming days with a view toward the impact for our company and customers.”

Confusing requirements for eligible EVs

NEPHI, UT - JULY 17: A line of Tesla cars charge on July 17, 2022 in Nephi, Utah. With more electric cars on the road, lack of charging infrastructure is becoming more of a problem for EV owners.  (Photo by George Frey/Getty Images)
NEPHI, UT - JULY 17: A line of Tesla cars charge on July 17, 2022 in Nephi, Utah. With more electric cars on the road, lack of charging infrastructure is becoming more of a problem for EV owners. (Photo by George Frey/Getty Images) (George Frey via Getty Images)

The IRS also released a list of vehicles eligible for the 2023 EV tax credit for consumers for purchase. The list, which will be updated as automakers submit vehicles that are eligible for EV tax credit, includes automakers like Ford, GM, Nissan, Rivian, and Tesla.

However the list of vehicles and their characterizations as a traditional vehicle (subject to $55,000 MSRP cap), or SUV, van or pickup truck (subject to $80,000 MSRP cap) seems somewhat arbitrary.

For instance, the Tesla Model Y 5-seat variant is subject to the $55,000 cap, whereas the Tesla Model Y 7 seat variant falls under the $80,000 cap, when two vehicles are otherwise identical in size. On the other hand, Volkswagen’s ID.4 is subject to the $55,000 cap, but the all-wheel drive version gets the $80,000 cap. The ID.4’s seating capacity is also only 5 seats for both models.

There are more variances and inconsistencies to note; perhaps Treasury or the IRS may give additional clarification in the future.

Pras Subramanian is a reporter for Yahoo Finance. You can follow him on Twitter and on Instagram.

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