Leased electric vehicles are added to select $7,500 tax incentives that kick in Jan. 1

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The U.S. Treasury Department will now allow electric vehicles that are leased to qualify starting Jan. 1 for up to $7,500 in clean vehicle tax credits.

The law allows for a conditional $4,000 tax credit for used EVs, the first time that previously owned EVs can earn some tax relief, and $7,500 for new options that qualify.

The decision to include leases and not just select purchased EVs is a boost to automakers who source parts and assemble outside North America, which would have been disqualified under the initial thrust of the climate-focused Inflation Reduction Act signed into law this summer. President Biden had tied a focus on U.S. and North American trade partners to the new law, which he argued was key to signage.

The IRS has released a fact sheet of frequently asked questions about the tax credits, which suggests that foreign-made EVs may qualify for tax credits through the commercial vehicle section of the law.

South Korea, home to Hyundai

and Kia
European makers, including Volkswagen

and Audi, and Japan, with Nissan

and others, had been pushing for approval to use the commercial EV tax credit to boost consumer access to their offerings. Automakers had argued the credit could be used to reduce leasing prices, which ultimately could get more drivers into EVs and help the U.S. and the rest of the developed world hit ambitious targets to halve greenhouse gas emissions by 2030.

European and Asian countries had considered filing complaint with the World Trade Organization, claiming violation of trade rules.

Both Hyundai and Kia, along with other makers, have started to build U.S. EV component and assembly plants, but those projects will be a few years in the making.

Read: 20 EV stocks that could rebound the most in 2023

As for new EV purchases, the updated Treasury guidance this week does not change the definition of what constitutes North American assembly.

The law also restricts battery minerals and component sourcing, sets income and price caps for qualifying vehicles and seeks to phase out Chinese battery minerals or components.

As for what consumers can expect, the used-EV tax credit is worth either $4,000 or 30% of the auto’s price, whichever is less. And the price cap of qualifying vehicles is $25,000. According to Cox Automotive, the average price of a used EV in the U.S. is $25,500, about right at the purchase-price limit for filing for the used EV tax credit.

Read: Thinking about an EV? First-ever $4,000 tax credit for used electric vehicles, and $7,500 for new, gets OK from Congress

The credits come with income caps as well: Individual tax filers must have income below $75,000 to be eligible for the credit.

Read: Used EVs: How to navigate the tight market for pre-owned electric vehicles like the Nissan Leaf and Chevy Volt

Tax breaks for buying or leasing new EVs have their own requirements. New EVs will need to be built with minerals — such as high-demand lithium and cobalt — that are extracted or processed in a country with which the U.S. has a free trade agreement. And they must include a battery that features a large percentage of components that were manufactured or assembled in North America. 

RelatedTesla’s Model Y is the hottest used car in the U.S. right now

Read: Tesla reports better-than-expected Q2 profit, jump in sales

The legislation also includes a cap on the suggested retail price of eligible vehicles of $55,000 for new cars and $80,000 for pickups and SUVs. Credits would be capped to an income level of $150,000 for a single filing taxpayer and $300,000 for joint filers for new vehicles, and at $75,000 and $150,000 for used cars. 

Don’t miss: The 2023 Chevrolet Bolt EUV review: The electric hatch is a top-rated EV under $30K

Proposed legislation removes prior requirements that called for qualified vehicles to have solely plug-in electric drive motors. And the IRA leaves out a 200,000-vehicle-per-manufacturer cap that automakers fought against. That means Tesla

 and Toyota
 which had all reached the cap, can lure buyers with this tax break yet again.


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