EV Tax Credit Leasing Loophole: A Strategic Windfall for Automakers and Investors

The Inflation Reduction Act (IRA) of 2022 reshaped the electric vehicle (EV) market by introducing a $7,500 clean vehicle tax credit. However, its most consequential provision emerged not for individual buyers but for automakers and leasing companies. By classifying leased EVs under the Commercial Clean Vehicle Credit (Section 45W), the IRA created a "loophole" that allowed businesses to bypass strict income, pricing, and sourcing criteria, capturing the full tax benefit, according to IRS guidance on Section 45W. This structural advantage has become a cornerstone of automotive sector profitability in 2025, enabling automakers to optimize incentives and pass savings to consumers through leases.

The Leasing Advantage: How Automakers Captured Tax Credits

The IRA's Section 45W permits businesses to claim the tax credit for EVs used in commercial operations, with no restrictions on battery sourcing or North American assembly, as outlined in the Commercial Clean Vehicle Credit requirements. Leasing companies and automakers exploited this by structuring leases as commercial transactions, effectively sidestepping the personal tax credit's stringent requirements. For example, leased EVs accounted for 67% of the U.S. EV market by March 2025, up from 15% in 2022, according to a S&P Global Mobility analysis. Automakers like Hyundai, Kia, and Ford leveraged this to offer discounted lease terms, with the average lessee receiving $6,696 in incentives in 2024-far exceeding the $4,257 average for purchasers, per J.D. Power incentives data.

The strategy's appeal lies in its simplicity: the lessor claims the tax credit and redistributes the savings via lower monthly payments or upfront rebates. This dynamic allowed automakers to target high-income buyers and premium models, who might otherwise be excluded from the personal tax credit due to income caps, as explained in a TaxShark guide to eligibility. For instance, Ford and General Motors (GM) launched programs where their captive finance arms made down payments on EVs before the tax credit's September 30, 2025, expiration, effectively "locking in" the subsidy and extending its benefits to customers for months, according to a Reuters report.

Profitability and Market Dynamics: Winners and Losers

The leasing loophole directly boosted automaker margins. In Q1 2025, EV leasing accounted for 58% of new lease originations, driven by tax-credit-enabled discounts, per NVLA lease originations data. Ford and GM's creative structuring-such as pre-deadline down payments-allowed them to maintain lease pricing advantages even as the credit expired. Conversely, Tesla, which did not adopt similar tactics, raised lease prices for the Model Y and Model 3 by 15–20% in Q3 2025, as noted in an Ars Technica report.

However, profitability gains are uneven. Original equipment manufacturers (OEMs) faced broader challenges, including softening demand and rising production costs. EBIT margins for OEMs fell to 5.4% in Q1 2025, as the dual burden of producing EVs and internal combustion engine vehicles squeezed margins, according to a Bain analysis. Meanwhile, leasing companies and automakers with robust tax-credit capture strategies, such as Ford and GM, outperformed peers by maintaining sales momentum through Q3 2025, per the Cox Automotive forecast.

The Expiration Dilemma: Short-Term Gains, Long-Term Risks

The leasing loophole's expiration on September 30, 2025, triggered a surge in Q3 sales but also exposed vulnerabilities. Cox Automotive reported 410,000 EVs sold in Q3 2025-a 21% year-over-year increase-yet analysts predict a post-October sales dip as incentives vanish, according to an NPR report. Automakers are now grappling with how to sustain demand without subsidies. Ford and GM's temporary workarounds, while innovative, are inventory-dependent and cannot fully offset the credit's loss.

Investors must also weigh the risk of saturated used EV markets. As reported by CNBC, Barclays analyst Dan Levy warned that aggressive leasing discounts could lead to returned vehicles flooding a declining resale market, further eroding OEM profits. Tesla's price hikes and GM's $1,000-per-vehicle dealer incentives highlight the sector's fragility in a post-subsidy era, per a USA Today story.

Strategic Implications for Investors

For investors, the IRA's leasing loophole underscores the importance of structural advantages in policy-driven markets. Automakers with strong leasing divisions and tax-credit capture capabilities-such as Ford and GM-are better positioned to navigate near-term headwinds. Conversely, those reliant on direct sales (e.g., Tesla) face steeper challenges unless they adapt pricing strategies or secure new incentives.

Long-term, the sector's profitability will hinge on technological advancements and cost reductions. While the IRA's incentives are waning, continued investment in battery efficiency and AI-driven pricing models could sustain leasing appeal, as discussed in a DeFi Solutions analysis. Investors should monitor automakers' ability to innovate beyond subsidies, particularly as global trade policies and raw material costs add uncertainty.