The Tax Credit Exception for Leased Electric Vehicles
link to page 1 link to page 1 
March 1, 2024
The Tax Credit Exception for Leased Electric Vehicles
The Inflation Reduction Act (P.L. 117-169) created or
recycled by an FEOC. If any of these conditions is violated,
modified three tax credits for purchases of electric vehicles
vehicles become ineligible for even partial credits. Table 1
(EVs): the clean vehicle credit (CVC), the used clean
summarizes the five domestic content and manufacturing
vehicle credit (UCVC), and the credit for qualified
requirements in the CVC.
commercial clean vehicles (CQCCV). These credits may
contribute to both the reduction of greenhouse gases and the
Table 1. Domestic Content and Manufacturing
promotion of domestic industry, policy initiatives that at
Requirements in the Clean Vehicle Credit, by Year
times can conflict with each other.
North
Battery
Critical Minerals
This In Focus describes one such conflict: the exception for
American
Components
leased electric vehicles. Since businesses have the ability to
Final
Domestic
FEOC
Domestic
FEOC
receive tax credits for a broader group of electric vehicles
Assembly
Content
Ban
Content
Ban
leased to customers, car dealers may pass tax savings to
individuals who lease vehicles that are ineligible for the
2023
Yes
50%
N.A.
40%
N.A.
CVC. Because the CVC has certain “made in America”
2024
Yes
60%
Yes
50%
N.A.
requirements and other restrictions not present in the
CQCCV, the leased vehicles exception may promote larger
2025
Yes
60%
Yes
60%
Yes
emissions reductions at the expense of domestic industry.
2026
Yes
70%
Yes
70%
Yes
Clean Vehicle Credit Requirements
2027
Yes
80%
Yes
80%
Yes
The CVC allows taxpayers to receive up to $7,500 for
purchasing new EVs. Eligible EVs must be made by a
2028
Yes
90%
Yes
80%
Yes
qualified manufacturer, weigh less than 14,000 pounds,
2029
Yes
100%
Yes
80%
Yes
have four or more wheels, and be intended for use on public
streets, roads, and highways. Electric boats, motorcycles,
2030
Yes
100%
Yes
80%
Yes
and bicycles do not qualify.
2031
Yes
100%
Yes
80%
Yes
The CVC does not apply to all EVs. Rather, it applies to
2032
Yes
100%
Yes
80%
Yes
EVs meeting certain domestic content and manufacturing
requirements. The $7,500 total credit is the sum of two
Source: Internal Revenue Code §30D.
smaller credits: a $3,750 credit for vehicles meeting
Notes: Vehicles acquired after August 16, 2022, must undergo final
the critical minerals requirement and a $3,750 credit for
assembly in North America. The domestic content requirements and
vehicles meeting the battery components requirement. To
FEOC bans apply based on the year a vehicle is placed in service. The
meet the critical minerals requirement, a certain percentage
domestic content requirements denote (a) the share of an EV’s
of the critical minerals in an eligible EV’s battery must
battery components that must be manufactured or assembled in
have been extracted or processed in the United States,
North America; and (b) the share of critical minerals in the EV’s
extracted or processed in a country with which the United
battery that must be extracted or processed in the United States,
States has a free trade agreement, or recycled in North
extracted or processed in a country with which the United States has
America. To meet the battery components requirement, a
a free trade agreement, or recycled in North America. The clean
certain share of an EV battery’s component parts must be
vehicle credit does not apply to vehicles placed in service after 2032.
manufactured or assembled in North America. The
applicable percentages for both requirements are shown in
In addition, taxpayers must have modified adjusted gross
Table 1. If a car meets just one requirement, it is eligible
incomes at or below certain thresholds in either the year
for a $3,750 credit.
they claim the credit or the year before. The thresholds are
$150,000 for single individuals without dependents,
EVs must meet additional domestic requirements to qualify
$225,000 for single individuals with dependents (known as
for the CVC. First, eligible EVs must undergo final
“heads of household”), and $300,000 for married couples.
assembly in North America. Second, starting in 2024, none
of the battery components in credit-eligible vehicles may
Finally, vans, SUVs, and pickup trucks with manufacturer
have been manufactured or assembled by a foreign entity of
suggested retail prices (MSRPs) above $80,000 do not
concern (FEOC) (a company significantly influenced by the
qualify for the CVC, nor do other vehicles with MSRPs
governments of China, Russia, Iran, or North Korea). Third,
above $55,000. One rationale for such ceilings could be to
starting in 2025, none of the critical minerals in an eligible
prevent high-wealth, low-income individuals (such as heirs
EV’s batteries may have been extracted, processed, or
or wealthy retirees) from claiming the credit when
purchasing expensive EVs.
https://crsreports.congress.gov
The Tax Credit Exception for Leased Electric Vehicles
Businesses may also claim the CVC, but as discussed
authorizing the CQCCV—states that the income and price
below, they will generally instead claim the credit for
limits from the CVC do not apply to the CQCCV.
qualified commercial clean vehicles. The two credits cannot
be claimed for the same vehicle.
If the CQCCV were claimed only for vehicles used in the
ordinary course of business—for example, vehicles used to
Leased Vehicles and the Avoidance of
transport goods from one place to another—then it would
Clean Vehicle Credit Requirements
not be in potential conflict with the requirements in the
In lieu of the CVC, businesses purchasing new EVs may
CVC. Businesses would claim the CQCCV, and individuals
choose to claim the CQCCV. The CQCCV is calculated
would claim the CVC, with the two credits simply having
differently from the CVC, is not subject to domestic content
different requirements.
or manufacturing requirements, and can be claimed for
vehicles used in the ordinary course of business or leased to
However, IRC §45W(c)(1) states that vehicles “acquired for
customers.
use or lease by the taxpayer and not for resale” are eligible
for the CQCCV. Due to the phrase “or lease,” car dealers
The CQCCV may be claimed for all-electric vehicles, fuel
have begun claiming the CQCCV for vehicles they lease,
cell vehicles, and certain hybrid electric vehicles. The credit
then passing some or all of the benefits to consumers
differs by vehicle type, as discussed below:
through discounts or price reductions.
• For hybrid vehicles, the credit equals the incremental
This tactic has been applied to vehicles not eligible for the
cost of the vehicle or 15% of the vehicle’s cost,
CVC. For example, Hyundai advertises lessees’ ability to
whichever is lower;
receive a “$7,500 EV Lease Bonus” for the Ioniq 5 SE
Standard Range, which is not manufactured in North
• For all-electric and fuel cell vehicles, the credit equals
America. Dealers and manufacturers say they pass the
the incremental cost of the vehicle or 30% of the
credit to consumers for dozens of leased EV models,
vehicle’s cost, whichever is lower.
including EVs above the MSRP limits and EVs
manufactured outside North America. (Hyundai leases
A vehicle’s incremental cost is defined as the additional
more than 40% of its EVs, up from just 5% before certain
cost for an electric, hybrid, or fuel cell vehicle as compared
domestic CVC restrictions began taking effect.) Finally,
with a gas- or diesel-fueled vehicle of similar size and use.
over half of EV drivers have household incomes above
Hybrid and all-electric vehicles must have a battery
$100,000, and roughly one-third have incomes above
capacity of at least 7 kilowatt hours if they weigh less than
$200,000, suggesting that some taxpayers above the CVC
14,000 pounds and at least 15 kilowatt hours if they weigh
income limits could utilize the leased vehicles exception.
14,000 pounds or more. The CQCCV may not exceed
$7,500 for a vehicle weighing less than 14,000 pounds. For
The economic benefits of the leased vehicles exception will
vehicles weighing 14,000 pounds or more, the CQCCV
likely be split between lessees, car dealers, and other
may not exceed $40,000. Certain heavy-duty vehicles
businesses along the EV supply chain based on a variety of
ineligible for the CVC may therefore qualify for CQCCVs.
factors. For example, if a car dealer reduces the down
payment on a leased EV by $1,000 in response to the
The CQCCV is nonrefundable, meaning that businesses are
CQCCV, then the lessee gains $1,000, while the dealer
not entitled to a refund if their tax credits exceed their tax
gains the remaining $6,500. Conversely, if a car dealer
liabilities. However, any unused credits may be carried
lowers the down payment by $6,500, then the lessee would
forward to offset future tax liabilities. Tax-exempt
receive a $6,500 benefit, while the dealer would receive
organizations are eligible to receive the credit as a direct
$1,000. Insofar as the leased vehicles exception boosts
cash payment instead of as a nonrefundable tax credit.
demand for EVs, some of the gains may also be passed to
car manufacturers or suppliers of raw EV materials. This is
The CQCCV does not have any domestic content or
especially true of foreign-sourced materials that cannot be
manufacturing requirements. Qualifying vehicles need not
included in CVC-eligible vehicles.
be assembled in North America, nor must they draw their
battery components or critical minerals from domestic
Nicholas E. Buffie, Analyst in Public Finance
sources. Battery components and critical minerals may also
be purchased from FEOCs. Moreover, subsection (d)(1) of
IF12603
Internal Revenue Code (IRC) Section 45W—the section
https://crsreports.congress.gov
The Tax Credit Exception for Leased Electric Vehicles
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF12603 · VERSION 1 · NEW
March 1, 2024
The Tax Credit Exception for Leased Electric Vehicles
The Inflation Reduction Act (P.L. 117-169) created or
recycled by an FEOC. If any of these conditions is violated,
modified three tax credits for purchases of electric vehicles
vehicles become ineligible for even partial credits. Table 1
(EVs): the clean vehicle credit (CVC), the used clean
summarizes the five domestic content and manufacturing
vehicle credit (UCVC), and the credit for qualified
requirements in the CVC.
commercial clean vehicles (CQCCV). These credits may
contribute to both the reduction of greenhouse gases and the
Table 1. Domestic Content and Manufacturing
promotion of domestic industry, policy initiatives that at
Requirements in the Clean Vehicle Credit, by Year
times can conflict with each other.
North
Battery
Critical Minerals
This In Focus describes one such conflict: the exception for
American
Components
leased electric vehicles. Since businesses have the ability to
Final
Domestic
FEOC
Domestic
FEOC
receive tax credits for a broader group of electric vehicles
Assembly
Content
Ban
Content
Ban
leased to customers, car dealers may pass tax savings to
individuals who lease vehicles that are ineligible for the
2023
Yes
50%
N.A.
40%
N.A.
CVC. Because the CVC has certain “made in America”
2024
Yes
60%
Yes
50%
N.A.
requirements and other restrictions not present in the
CQCCV, the leased vehicles exception may promote larger
2025
Yes
60%
Yes
60%
Yes
emissions reductions at the expense of domestic industry.
2026
Yes
70%
Yes
70%
Yes
Clean Vehicle Credit Requirements
2027
Yes
80%
Yes
80%
Yes
The CVC allows taxpayers to receive up to $7,500 for
purchasing new EVs. Eligible EVs must be made by a
2028
Yes
90%
Yes
80%
Yes
qualified manufacturer, weigh less than 14,000 pounds,
2029
Yes
100%
Yes
80%
Yes
have four or more wheels, and be intended for use on public
streets, roads, and highways. Electric boats, motorcycles,
2030
Yes
100%
Yes
80%
Yes
and bicycles do not qualify.
2031
Yes
100%
Yes
80%
Yes
The CVC does not apply to all EVs. Rather, it applies to
2032
Yes
100%
Yes
80%
Yes
EVs meeting certain domestic content and manufacturing
requirements. The $7,500 total credit is the sum of two
Source: Internal Revenue Code §30D.
smaller credits: a $3,750 credit for vehicles meeting
Notes: Vehicles acquired after August 16, 2022, must undergo final
the critical minerals requirement and a $3,750 credit for
assembly in North America. The domestic content requirements and
vehicles meeting the battery components requirement. To
FEOC bans apply based on the year a vehicle is placed in service. The
meet the critical minerals requirement, a certain percentage
domestic content requirements denote (a) the share of an EV’s
of the critical minerals in an eligible EV’s battery must
battery components that must be manufactured or assembled in
have been extracted or processed in the United States,
North America; and (b) the share of critical minerals in the EV’s
extracted or processed in a country with which the United
battery that must be extracted or processed in the United States,
States has a free trade agreement, or recycled in North
extracted or processed in a country with which the United States has
America. To meet the battery components requirement, a
a free trade agreement, or recycled in North America. The clean
certain share of an EV battery’s component parts must be
vehicle credit does not apply to vehicles placed in service after 2032.
manufactured or assembled in North America. The
applicable percentages for both requirements are shown in
In addition, taxpayers must have modified adjusted gross
Table 1. If a car meets just one requirement, it is eligible
incomes at or below certain thresholds in either the year
for a $3,750 credit.
they claim the credit or the year before. The thresholds are
$150,000 for single individuals without dependents,
EVs must meet additional domestic requirements to qualify
$225,000 for single individuals with dependents (known as
for the CVC. First, eligible EVs must undergo final
“heads of household”), and $300,000 for married couples.
assembly in North America. Second, starting in 2024, none
of the battery components in credit-eligible vehicles may
Finally, vans, SUVs, and pickup trucks with manufacturer
have been manufactured or assembled by a foreign entity of
suggested retail prices (MSRPs) above $80,000 do not
concern (FEOC) (a company significantly influenced by the
qualify for the CVC, nor do other vehicles with MSRPs
governments of China, Russia, Iran, or North Korea). Third,
above $55,000. One rationale for such ceilings could be to
starting in 2025, none of the critical minerals in an eligible
prevent high-wealth, low-income individuals (such as heirs
EV’s batteries may have been extracted, processed, or
or wealthy retirees) from claiming the credit when
purchasing expensive EVs.
https://crsreports.congress.gov
The Tax Credit Exception for Leased Electric Vehicles
Businesses may also claim the CVC, but as discussed
authorizing the CQCCV—states that the income and price
below, they will generally instead claim the credit for
limits from the CVC do not apply to the CQCCV.
qualified commercial clean vehicles. The two credits cannot
be claimed for the same vehicle.
If the CQCCV were claimed only for vehicles used in the
ordinary course of business—for example, vehicles used to
Leased Vehicles and the Avoidance of
transport goods from one place to another—then it would
Clean Vehicle Credit Requirements
not be in potential conflict with the requirements in the
In lieu of the CVC, businesses purchasing new EVs may
CVC. Businesses would claim the CQCCV, and individuals
choose to claim the CQCCV. The CQCCV is calculated
would claim the CVC, with the two credits simply having
differently from the CVC, is not subject to domestic content
different requirements.
or manufacturing requirements, and can be claimed for
vehicles used in the ordinary course of business or leased to
However, IRC §45W(c)(1) states that vehicles “acquired for
customers.
use or lease by the taxpayer and not for resale” are eligible
for the CQCCV. Due to the phrase “or lease,” car dealers
The CQCCV may be claimed for all-electric vehicles, fuel
have begun claiming the CQCCV for vehicles they lease,
cell vehicles, and certain hybrid electric vehicles. The credit
then passing some or all of the benefits to consumers
differs by vehicle type, as discussed below:
through discounts or price reductions.
• For hybrid vehicles, the credit equals the incremental
This tactic has been applied to vehicles not eligible for the
cost of the vehicle or 15% of the vehicle’s cost,
CVC. For example, Hyundai advertises lessees’ ability to
whichever is lower;
receive a “$7,500 EV Lease Bonus” for the Ioniq 5 SE
Standard Range, which is not manufactured in North
• For all-electric and fuel cell vehicles, the credit equals
America. Dealers and manufacturers say they pass the
the incremental cost of the vehicle or 30% of the
credit to consumers for dozens of leased EV models,
vehicle’s cost, whichever is lower.
including EVs above the MSRP limits and EVs
manufactured outside North America. (Hyundai leases
A vehicle’s incremental cost is defined as the additional
more than 40% of its EVs, up from just 5% before certain
cost for an electric, hybrid, or fuel cell vehicle as compared
domestic CVC restrictions began taking effect.) Finally,
with a gas- or diesel-fueled vehicle of similar size and use.
over half of EV drivers have household incomes above
Hybrid and all-electric vehicles must have a battery
$100,000, and roughly one-third have incomes above
capacity of at least 7 kilowatt hours if they weigh less than
$200,000, suggesting that some taxpayers above the CVC
14,000 pounds and at least 15 kilowatt hours if they weigh
income limits could utilize the leased vehicles exception.
14,000 pounds or more. The CQCCV may not exceed
$7,500 for a vehicle weighing less than 14,000 pounds. For
The economic benefits of the leased vehicles exception will
vehicles weighing 14,000 pounds or more, the CQCCV
likely be split between lessees, car dealers, and other
may not exceed $40,000. Certain heavy-duty vehicles
businesses along the EV supply chain based on a variety of
ineligible for the CVC may therefore qualify for CQCCVs.
factors. For example, if a car dealer reduces the down
payment on a leased EV by $1,000 in response to the
The CQCCV is nonrefundable, meaning that businesses are
CQCCV, then the lessee gains $1,000, while the dealer
not entitled to a refund if their tax credits exceed their tax
gains the remaining $6,500. Conversely, if a car dealer
liabilities. However, any unused credits may be carried
lowers the down payment by $6,500, then the lessee would
forward to offset future tax liabilities. Tax-exempt
receive a $6,500 benefit, while the dealer would receive
organizations are eligible to receive the credit as a direct
$1,000. Insofar as the leased vehicles exception boosts
cash payment instead of as a nonrefundable tax credit.
demand for EVs, some of the gains may also be passed to
car manufacturers or suppliers of raw EV materials. This is
The CQCCV does not have any domestic content or
especially true of foreign-sourced materials that cannot be
manufacturing requirements. Qualifying vehicles need not
included in CVC-eligible vehicles.
be assembled in North America, nor must they draw their
battery components or critical minerals from domestic
Nicholas E. Buffie, Analyst in Public Finance
sources. Battery components and critical minerals may also
be purchased from FEOCs. Moreover, subsection (d)(1) of
IF12603
Internal Revenue Code (IRC) Section 45W—the section
https://crsreports.congress.gov
The Tax Credit Exception for Leased Electric Vehicles
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF12603 · VERSION 1 · NEW