Does Tax Credit Apply to Leased Electric Cars?

Electronic vehicles have become increasingly common because of their sustainability and lower carbon emissions on the environment. If you want to acquire an electric vehicle but are looking to lease one, you may be wondering if you would qualify for a tax credit.

Unfortunately, if you avail an EV on a lease, you won’t be eligible for the tax credit; however, the person you lease your vehicle from can benefit from this financial incentive.

On the other hand, you may be eligible for a lower monthly cost if the lessor agrees to include the incentive in your lease contract, but you will have to negotiate while signing the agreement. 

Stay on the page to learn more about leasing electric cars and how the EV tax credit system works.

Leasing an Electric Car

Leasing an electric car involves different financial variables when compared to leasing a conventional car. Even though electric vehicles are starting to gain popularity, they still differ significantly from their gasoline-powered predecessors. The entire ownership cost is lower if you factor in fuel savings, and the cost of maintenance is often lower.

However, leasing an electric vehicle could end up in the loss of a financial incentive known as a tax credit. Furthermore, costs can add up when you take into account installing a home car charger and changing recharging rates.

Leased Electric Cars qualify Tax Credit

Is Leasing an Electric Vehicle Better?

Once you have made a decision to own an electric vehicle, you have to choose between buying one at full price or leasing it. If you decide to lease an EV, here are a few things to consider:

State and Federal Tax Credits

You may be eligible for over $7500 federal tax credit if you purchase a qualifying EV. If you are eligible, this tax credit can reduce the cost of the acquisition. 

However, in case you acquire the electric vehicle on lease, you won’t be eligible for this tax credit. Nevertheless, the manufacturer can decide to give a cheaper lease in exchange for including the amount of the tax incentive in your lease.

Additionally, you might be eligible for state-specific tax breaks or refunds. Although some states might provide tax benefits for leasing, others might not. For a complete list of federal and state benefits for EVS, consult the US Department of Energy Alternative Fuels Data Center.

Better Car Batteries

Electric vehicles are becoming more widespread, and therefore, the batteries are becoming better, stronger, and upgraded. With better technological advancements, car companies are manufacturing batteries with sodium ions instead of lithium ones, which are also more affordable, lighter, and even better for the environment.

But often, the battery’s capacity reduces as your electric engine becomes older. The value of your vehicle may be lowered if your long-term plans include selling it because of an outdated battery and dwindling range. However, if you choose to lease, you must agree on the residual value in advance with your dealer. This could be to your advantage.

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Depreciation of Electric Vehicles

It’s possible that electric vehicles lose value more quickly than gasoline-powered ones. For example, it is predicted that two of Nissan’s EVs will lose up to 70% of their value in just five years. 

But if you purchase the vehicle at full price and are eligible for state and federal tax incentives or refunds that considerably mitigate this depreciation, this discrepancy might not be a huge concern.

One advantage of leasing an EV is that you may not have to assume the car’s depreciation risk beyond that which is specified in your leasing contract. This does not include the excess wear and tear penalties and excess mileage.

Furthermore, if your electric car depreciates more quickly than anticipated, the leasing firm would be responsible for making up the difference in value.

In addition to depreciation and technological advancement, electric vehicles have actual constraints that conventional cars do not.

Limited Range

Electric vehicles have a limited range before their batteries run out. You might only be able to drive locally in vehicles with limited range, like the Nissan Leaf, which has a 40kWh battery and a limited range of 150 miles.

There are other EVs that have longer ranges, like the Tesla Model 3 Long Range, which provides over 310 miles.

Whatever the scenario, if your trip is longer than the car’s range, you need to prepare in advance for your vacation to ensure you can reach charging points. Although they are growing more widespread, petrol stations are still far more prevalent than charging stations.

Charging and Degeneration of Batteries

Owning an electric vehicle means that you necessitate a place to charge your vehicle. This means you need to have a parking spot near an electrical outlet. Any regular electrical outlet can be used to charge your car, or you can utilize Level 2 charging, which is faster but calls for a 240-volt outlet. 

If your residence doesn’t have access to an electrical outlet, which is most likely the case, you will need a permit from your neighborhood to get one installed by an electrician. 

The battery in your car will also gradually lose life over time, just like the battery in your smartphone does. That implies that your driving range will gradually decrease.

Leased Electric Cars qualify for Tax Credit

Leasing Used Electric Vehicles

Instead of leasing brand-new vehicles, used vehicles are an alternative option. However, leasing a second-hand electric vehicle could be trickier to find than leasing a conventional vehicle. If you manage to find a used electric vehicle to lease, there is a significant distinction you need to be aware of.

If your rechargeable battery begins to deteriorate, you might be liable for its repair or replacement, except if your lease warranty will pay for it.

Make sure the vehicle is covered by a warranty, or you have the funds available to cover the purchase of a new battery due to the high expense of changing a battery. Otherwise, renting a used electric vehicle is similar to renting a used conventional vehicle.

Now that you are sure of the many benefits and implications of acquiring an electric vehicle on lease, let’s move on to the EV tax credits and who is eligible for this perk.

Electronic Vehicle Tax Credit

The EV tax credit is like a reward designed by the federal government to encourage people to buy more sustainable cars and choose electric vehicles. The incentive is actually a tax credit amounting to $7500 that you are qualified for, not a check that you may receive in the mail after purchasing an EV. 

All plug-in and electric vehicles are eligible for this credit, and the exact credit amounts can be obtained here.

A federal EV tax credit may lower the cost of purchasing or leasing an electric car. However, in order to claim a tax credit on a plug-in EV, your particular tax circumstances will determine your eligibility. This well-liked EV incentive program occasionally might have important benefits.

Your vehicle must comply with a number of requirements in order to be eligible for any incentives, including:

  • The vehicle must be acquired after 31st December 2009.
  • Must have an external recharging source with a plug.
  • Must utilize a traction battery.
  • Hold a minimum of 4kWh battery capacity.
  • It should have a maximum weight limit of 14000 pounds.
  • Should adhere to emission standards.

Now that you know which vehicles are eligible for the tax credit let’s dive into a bit more detail.

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How Much Does the Federal Tax Credit Amount?

Before anything else, it’s critical to comprehend the “may” and “up to” clauses that the government places ahead of the $7,500 credit. In other words, you might be eligible for a federal tax credit for an electric car of up to $7,500. This credit may initially appear to be a straightforward fixed amount, but that is regrettably not the case.

For instance, the amount of the federal tax incentive would be around $3500 on the purchase of a Nissan Leaf and under the circumstance that you still owed the annual income tax. Your federal income tax obligation must be at least $10,000 in order for you to be eligible for the full $7,500 credit.

That’s not the only disappointment; any unused tax credit amount is not refundable and cannot be carried forward to the next taxing year. 

Tax Credit Apply to Leased Electric Cars

Additional Federal Tax Credit Rules to Consider

Hopefully, by now, it must be clearer as to who can qualify for tax credit and the maximum amount of incentive you might be eligible for. But these aren’t the only things you need to be careful of; make sure you thoroughly review all the fine prints before making your final decision. After all, this is the government of the United States we are dealing with. 

Firstly, be aware that such federal tax benefits are temporary and may have already passed their expiration date for your car. Sales from certain companies surpass the preset barrier of certified sales as the electric vehicle demand vehicles rise. 

This also applies to US manufacturers, such as Tesla, which is no longer entitled to any federal tax credits after selling more than 200,000 eligible plug-in electric vehicles a few years ago.

Since General Motors and other automakers have already reached that milestone, the bill to restore the credit may be changed, which would be advantageous to them. Toyota recently reported that it was close to selling 200,000 electric vehicles, at which point it would no longer qualify for federal tax incentives.

You might still be eligible for a credit if that’s the case, but it’ll be running out on borrowed time as Toyota EV (or PHEV, to be more precise) credits will be rolled out progressively until 2023.

Additionally, the federal tax credit cannot be transferred, which is another crucial restriction to remember. Only the initial registered proprietor is eligible for this credit, meaning any second-hand EVs you currently own or plan to buy are instantly ineligible.

The same guidelines are also applicable to any lease for an electric vehicle. In this instance, the manufacturer who is providing you with the lease receives the tax credit.

Although it’s not certain, a manufacturer might be prepared to factor the tax incentive into the price of your lease to help bring down your payments and asking is absolutely worthwhile!

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Do Different States Offer Different Tax Credits?

Absolutely. There are other state and local incentives for plug-in cars and cars that run on alternative energy sources, even though the federal tax credits for electric and natural gas cars receive the most attention.

There are twelve or more initiatives in many states. But several only concern businesses. Credits can also take the form of charge and regulatory waivers. Other benefits don’t involve money, including free parking and access to carpool lanes.

In a majority of the states, retail purchasers of approved alternative fuel or electric-drive vehicles can receive some financial assistance in the form of refunds, reduced registration fees, tax credits, or reduced vehicle taxation.

The state with the most electric vehicles on the road, California, has a variety of electric vehicle incentives, all of which are listed on the CARB’s website. In addition to other criteria, the larger prizes are income-qualifying and are included in the California Clean Vehicle Rebate Project.

State-to-state differences exist in initiatives and offerings. For any new EV lease or purchase in New York, a “Drive Clean” reimbursement of up to $2000 is offered. There are, however, two prerequisites: you must promise to maintain the automobile for at least three years, and you have to be a state resident.

Tax Credit Applies to Leased Electric Cars

The Bottom Line

Ever since the demand for EVs has increased, the EV tax credit has become a contentious topic, and the current administration is looking to increase the manufacturing of EVs and increase the tax credit to approximately $12500. On the other hand, some MPs would want to see the benefit disappear entirely.

If you have decided to buy an EV, the Federal EV tax credit is unquestionably something to take into account. If you are eligible, this might significantly reduce the price of a new model. Even if you are not eligible for federal credit, you may still be eligible for various state and municipal EV tax credits.

To answer the question ‘does a lease electric car qualify for a tax credit,’ we know that although leasing might not benefit in terms of the financial incentive, it may help in lowering the monthly cost of the leasing agreement.

Additionally, leasing an EV also protects you from the quick depreciation of these cars and their batteries. Furthermore, there are chances of making a profit in case your vehicle doesn’t depreciate along with the following benefits:

  • When your present lease expires, you will be able to transition to the most recent technology.
  • The majority of lease agreements for electric vehicles are signed for 2 – 3 years. It’s doubtful that you’ll experience any battery issues during that time that aren’t protected by the manufacturer’s new car warranty.
  • When you lease a car, you’ll discover that manufacturers will provide you with loyalty discounts to stick with the company or acquisition packages to persuade you to convert to another. Non-lease clients are not eligible for these.
  • Finally, newer EV versions with longer ranges, quicker charging, fresh features, and improved performance are released every year. If you choose the wrong Electric Vehicle today, you can have little equity left over when it becomes the time to upgrade.

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