A Loophole Big Enough to Drive an EV Through?

The latest U.S. Treasury guidelines for tax credits for the sale of electric and plug-in hybrid-electric vehicles establish vehicle, battery and battery-component country-of-origin restrictions and limits on vehicle price and recipient income. Under the current guidelines, subject to change pending public comment, most EVs/PHEVs buyers will not get the full $7,500, and some will get no tax credit.

However, perhaps as a concession to many foreign automakers, Treasury ruled last month that a separate commercial-vehicle tax credit for EVs and PHEVs carries no sourcing, income or price restrictions. As The Wall Street Journal recently reported, “dealers or auto finance companies could pocket the tax credits or pass them onto customers.” In short, that rule simplifies things: Just be a commercial lessor of almost any EV/PHEV on the market today, and you have the full tax incentive of $7,500 for your leasing company.

When I started in this business over three decades ago, there were many independent and bank-owned vehicle leasing companies. Also, because credit was available for this, many franchise dealers ran their own independent leasing companies and enjoyed the benefits of “manufacturing their own used cars.” Then, OEM captive leasing companies introduced highly subvented vehicle leases as a way to make consumer incentives less obvious; this put most of the independent leasing companies out of business, as none could really compete with the subvention.

Now, however, with an “extra” $7,500 in federal tax credits on the table for each EV/PHEV, independent and dealer leasing may see a resurgence.

Remember, in addition to the front-end $7,500 tax incentive, all a dealer lessor has to do is run a vehicle for 24 months and get the retail sale price below $25,000, and there is another used-car tax credit of $4,000 or 30% (whichever is less) for all used EVs/PHEVs. Again, there are no country-of-origin requirements for the vehicle, battery, etc., for a dealer’s first retail sale of a used EV to a retail consumer who makes less than $75,000 year.

Let’s give a quick example: a Hyundai Kona retailing for $34,000. As a franchise dealer, sell it to a customer, and it’s likely to receive zero tax-credit incentive – and, like most EVs, a very low gross margin for the dealer, even at full MSRP.

Now, lease (or offer it through a vehicle subscription) that same vehicle to the same consumer as a commercial lessor, and the leasing company earns the $7,500 tax credit. Now, everyone would agree a $7,500 credit on a $34,000 vehicle is significant – but it gets better, as a dealer lessor would also control the used vehicle when it comes off lease, “manufacturing their own used car.”

So after, say, three years, that vehicle is written down to a $15,000 or so residual, and as a dealer in 2026, you sell it to a retail customer making less than $75,000 a year ($150,000 for a couple). Now, there is another $4,000 “cash on the hood” (like “cash for clunkers,” starting in 2024 the customer can just sign over the incentive and the dealer gets paid by the federal government) – that’s a $4,000 cash rebate on a $15,000 cap-cost vehicle.

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I’m sure the captive OEMs will get more heavily involved in the leasing game as well. But, given their losses in EVs right now, I doubt there will be much subvented leasing for a dealer or independent finance company to compete with. And, of course, if the dealer puts out an EV lease through the captive, there is no guarantee the dealer will get the used car at the end of the lease, which is one of the most lucrative parts of the equation. Ford, for instance, has already said all of the EVs leased by their captive will come back to the manufacturer, unlike leases on internal-combustion engine vehicles.

John F. Possumato (pictured, above left) is the CEO of DriveItAway, an app/platform provider to facilitate dealer-based consumer vehicle subscriptions and leases.