Tax Rules Associated with Financing of Electric Vehicles

As the Biden Administration moves forward with its mission of reducing the carbon footprint of the United States, it is rapidly becoming apparent that more “Green Energy” financing opportunities are emerging. This article will discuss the growing popularity and potential opportunity in the financing of electric vehicles. 

Arguably the largest public focus of tax incentives currently appears to be on electric-powered vehicles (“EVs”) and plug-in hybrid vehicles (“PHEVs”). Many vehicle manufacturers are advertising their new soon-to-be-delivered EVs. 

For corporate fleets, specialized fleet management companies typically managed the leases of automobiles or light truck fleets used by corporate customers handling the full lifecycle of the vehicles. Generally, these companies were able to utilize the accelerated tax depreciation created in acquiring and owning these fleets. 

With the growing popularity and availability of electric vehicles and the substantial tax credits available, some fleet management companies appear to have reached a point where they cannot efficiently absorb the tax benefits being generated when acquiring large fleets of these electric vehicles; their business is principally fleet management, not tax benefit utilization. For example, assuming a typical fleet EV costs $50,000 and is eligible for a $7,500 tax credit, acquiring 10,000 vehicles will create a $75 million tax credit! Herein lies an emerging opportunity for traditional leasing companies to invest. 

Current Tax Rules 

Under Internal Revenue Code (“IRC”) Section 30, subtitled, “Credit for Qualified Electric Vehicles,” tax credits are available for “qualified” EVs and PHEVs. Under IRC Sec 50(b), an EV or PHEV is a qualified vehicle if (i) it meets the IRC technical requirements (i.e., battery capacity), (ii) is new, (iii) is used in the U.S. and (iv) is not used by a government unit or a tax-exempt organization. Exceptions with respect to the usage exist if leased for less than six months. The credits vary based on the capacity of the battery used in the vehicle; the manufacturer certifies the extent of the credit available. The initial tax basis of the vehicle is reduced by the full amount of the tax credit. The tax credits are currently available for only the first 200,000 new EVs delivered by a specific manufacturer. During the year that the manufacturer is expected to deliver the 200,000th car, the credit is phased down. The maximum credit is $7,500 depending on the EV specifications. 

A list of the credits by vehicle is available at https://www.fueleconomy.gov/feg/taxevb.shtml. 

As of the writing of this article, such tax credits are no longer available for some of the more popular manufacturers, including Tesla and General Motors as they have already delivered 200,000 EVs. Currently the maximum tax credits are still available for other popular mid-sized vehicles, such as the Ford Mustang Mach-E, certain Audis, Volvos and Jaguars. 


The Sec 30D tax credit is subject to a proportionate recapture in the first three full years after the vehicle is placed in service, only if the vehicles cease to be a “qualified vehicle” under IRC Sec 50(b). A vehicle loses its qualified status if (i) it is converted to non-EV power or (ii) is subsequently used outside the U.S. or by a governmental unit or tax-exempt entity and only if the original owner knows or has reason to know that the vehicle will be used as such. 

Accordingly, a leasing company may acquire these vehicles, claim the credit and be subject to no tax credit recapture when the autos are traded-back or disposed of within the first three years of usage. 

Current Tax Proposals 

The Biden Administration’s Build Back Better proposal currently under discussion in Congress includes numerous incentives to further promote EVs. The following are some of the proposed tax incentives: 
1. Enable the credit to be refunded in cash as opposed to being a credit against taxes due. 
2. Increase maximum EV credit to $12,500 depending on the parameters below:

a. Increase the base credit from $2,500 to $4,000. 
b. Provide an additional credit of up to $3,500 based on battery capacity, which increases by 2027.
c. Provide an additional credit of $4,500 if the vehicle specified was assembled in a U.S. unionized facility. 
d. Provide an additional credit of $500 for batteries manufactured in the U.S. 

3. Eliminate the EV credit limitations of 200,000 deliveries by manufacturer. 
4. Provide for easier transfer of credit between parties such as users, lessees and lessors. 
5. Provide a credit of up to $2,500 for previously owned EVs.
6. Provide a credit for qualified commercial vehicles equal to 30% of the initial tax basis of the vehicle. 
7. Extend the availability of the credits to Dec. 31, 2031.

While obviously there will be a lot of “horse trading” in Congress (ironic terminology when discussing EVs), it is evident that there will be steps toward creating additional forms of tax incentives to further the adoption of EVs. As such, it is suggested that lessors familiarize themselves with this market segment, analyze whether they have the capacity to utilize the tax benefits (tax credits and depreciation) and evaluate it as a potential leasing or financing opportunity with the added benefit of supporting a cleaner environment.  

Disclaimer: The views expressed here are that of the author and not of the organizations or entity that the author works with or for. The author is not providing tax, accounting, legal or business advice herein. Any discussion of U.S. tax matters is not intended or written to be used by any taxpayer for the purpose of avoiding U.S. tax-related penalties. Each taxpayer should seek advice from their own independent tax, accounting or business adviser.