February 21, 2024

Dave Walters of Orange County, Calif., stands next to his newly leased Hyundai Ioniq 5 electric vehicle.

Courtesy of Dave Walters

Fed up with high gas prices and the allure of federal tax credits, Dave Walters decided to equip his next car with an all-electric Hyundai Ioniq 5.

The Orange County, Calif., resident initially considered buying a used model until he learned he could lease the vehicle and take advantage of a key loophole in the Lower Inflation Act.

Buying a used Ioniq made in South Korea and Indonesia won’t get him a $7,500 discount through federal tax credits. Rental vehicles will be.

“I crunched the numbers — without lease credit versus with lease credit — and that put me in the lead, which is the main reason I’m going in this direction,” he said. “It’s a few hundred dollars less a month.”

Walters is such a consumer Hyundai Motor Tesla and other automakers have begun targeting EV leasing to take advantage of an IRA loophole that allows vehicles built outside of North America to qualify for the credit.legislators such as U.S. Senator Joe Manchin, DW.V.Intend to block rules.

Under the IRA, leases are classified as Commercial business and thus exempt from regulations requiring vehicle and battery components to be manufactured in North America.Most electric cars sold today unqualified Receive a full tax credit due to where the vehicle or component was manufactured.

Sen. Joe Manchin, DW.V., speaks with other lawmakers on the House floor ahead of a joint session of Congress at the U.S. Capitol in Washington, April 27, 2023.

Elizabeth Franz | Reuters

But leasing can save drivers thousands of dollars, as long as the companies that get the credit pass the savings on to consumers.

“I’m not surprised that manufacturers say they’re going to do more leasing,” said Charlie Chesbrough, senior economist at Cox Automotive. At $7,500, it’s truly a game changer and has had a huge impact on our monthly payments.”

For a $50,000 EV and a 36-month lease, Chesbrough estimates the full $7,500 tax credit equates to $222 in monthly savings for consumers.

Auto research firm Edmunds reported that about 37% of electric vehicles purchased in April were leased, up from 25% in the first quarter and 13% last year.

“It sort of creates a loophole for automakers to target wealthier customers who might be more likely to be able to afford and actually get approved to buy an EV,” said Jessica Caldwell, executive director of insights at Edmunds. “It also allows them to level the playing field with competitors who get full tax credits on their purchases.”

Hyundai Motor America CEO Randy Parker said the percentage of Hyundai Ioniq 5 vehicles leased soared to more than 30 percent in April from about 2 percent at the start of the year. Starting this month, the company will offer vehicle lease agreements for $499 a month — below the industry average lease payment of $577, according to Edmunds.

The Kia EV6 on display at the New York Auto Show on April 13, 2022.

Scott Mill | CNBC

“We want to keep pushing and emphasizing leasing as much as possible so we can continue to take advantage of the tax credit and consumers can take advantage of the tax credit,” Parker told CNBC. “Now, that’s how the cards are dealt.”

Kia and Ford also said they would look to increase leasing of electric vehicles to lower pricing and increase sales.

Watson said Kia expects to increase its EV lease rate to 40% in the next few months from below 15% currently. Like Hyundai, Kia is offering its EV6 on a $499 lease agreement with a $4,999 down payment.

“Over the next few years, Kia will have to rely heavily on leasing to be able to pass on that $7,500 credit to the customer. That’s what we intend to do,” said Eric Watson, vice president of sales operations for Kia America .

Before the IRA passed, Hyundai and Kia, owned by the same Korean parent company, were the second-biggest sellers of electric vehicles in the U.S. behind Tesla.But their sales have fallen behind those General Motors and Ford, both of which have vehicles that are fully or partially eligible for the federal tax credit.

Hyundai and other automakers that don’t qualify for the IRA-mandated credits have opposed the rules, seeking a longer grace period for the new rules or a broad exemption under its U.S. electric vehicle program.

“It gave us a lifeline. I wouldn’t call it a level playing field,” Watson said of leases that qualify for the $7,500 tax credit.

President Joe Biden stands next to a Ford Mustang Mach-E SUV during a visit to the Detroit auto show, Sept. 14, 2022, to highlight electric vehicle manufacturing in the United States.

Kevin Lamarque | Reuters

A Ford spokesman said the company’s credit arm is working on a leasing strategy for electric vehicles such as the Mustang Mach-E, which is built in Mexico and currently qualifies for half of the federal tax credit if purchased. The company’s electric Ford F-150 Lightning is eligible for the full $7,500.

“We’re going to lease electric vehicles, and you’ll hear more from us very soon,” Ford Chief Financial Officer John Lawler said last month.

A GM spokesman said the company would not change its EV leasing strategy because all of its vehicles are eligible for the full tax credit. Only about 3% of GM’s electric vehicles are leased, he said.

While leases are typically only for a few years, automakers have touted electric vehicles to attract new customers to their brands.

Edmunds’ Caldwell said: “The sooner you get those customers on board with your brand, especially with new technology, I think the better your chances of retaining them.”

Temporary leasing can be an attractive option for many consumers, such as Walters, who purchased a 2009 Nissan Murano, as electric vehicles are still a nascent industry with changing technology and a plethora of new entrants .

“I want to give it a try and see if I really like it. It’s only been six weeks but it’s been really good so far,” Walters said. “I really like driving it, and I really like not having to pay for gas.”

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