Rent an EV or buy an EV: which is better?

Even though brands try to simplify the process of buying electric vehicles, buying an electric vehicle can be more complicated than buying a new traditional gas-powered car. Prices are high, vehicles are scarce, and many electrified vehicles come with federal and sometimes state incentives that aren’t always the easiest to understand. Well, let us help you. Here’s a quick guide to help you decide when to buy, when to rent, and what to buy an EV.

What is the Federal Tax Credit?

Since 2008, the US government has implemented a program encouraging the purchase of plug-in vehicles (electric and plug-in hybrid). A tax credit is applied to the tax payable, which means that it does not reduce or increase your taxable income, but rather is credited against any money owed to the federal government. The criteria are a bit difficult to parse through IRS legal documents, but I’ll help.

The federal tax credit is:

  • Ranging from $2,500 to $7,500 max. The base floor of $2,500 applies to any plug-in hybrid or electric vehicle with a minimum battery size of 5.0 kWh. After 5.0 kWh, each additional kWh is worth $417 credit, with a maximum of $7,500.
  • Only eligible for new vehicles.
  • Is limited to the first 200,000 plug-in vehicles sold by a company. After that, the program goes into declining mode, halving the amount every two fiscal quarters, until eliminating it entirely the following year or the fourth quarter. Currently, plug-in vehicles from General Motors and Tesla are no longer eligible for tax credits, as the two companies have sold over 200,000 plug-in cars. Toyota recently reached this threshold and is expected to enter the first phase of reduction by October 2022. (If you’re thinking of buying a Toyota BZ4X, now is the time to do so.)
  • It is a tax credit and not a tax refund.

It’s a tax credit, Not a tax refund

Tax credits are not the same as tax refunds. While tax credits allow a taxpayer to deduct a certain amount of tax they owe, a refund is a payment made by the government. Manufacturers, advertisers and some publications have gotten into the bad habit of announcing an after tax credit “price” as the actual price you would pay at the dealership. This is not how the federal tax credit works.

The federal tax credit comes from your personal tax payable, not the MSRP of the vehicle. Your payments and car financing are based on the full MSRP. The tax credit can only be applied to money owed to the federal government on your taxes, not as some kind of coupon that makes the vehicle cheaper to buy. Also, since this is a tax credit and not a refund, no additional money will be refunded to you. So if you only owe $2,000, you don’t get a $5,500 check from the federal government. You won’t get anything.

As my colleague James Gilboy explained, the high amount of untaxed income to qualify for the $7,500 is about $65,000 a year. Depending on where you live and if you have dependents, this could be solid middle class or below the poverty line. Either way, $65,000 of untaxed income, to be paid out at the end of the year as a lump sum, isn’t quite the common circumstance for the average VE-curious American. Three out of four Americans get tax refunds, and the IRS says the average tax refund check was just over $2,800 for 2021. Therefore, the tax credit won’t do the trick. business for most Americans.

When it makes sense to buy an EV

As the program currently stands, the range of curious EV buyers who want to take advantage of the tax credit program remains somewhat limited. The average American with a W-2 job probably won’t earn much, but if you fall into these categories, the tax credit could be a godsend.

  • W-2 high earner should owe about $7,500 in taxes after other credits and rebates
  • A 1099 independent contractor, or anyone with multiple streams of untaxed income that will inevitably be due at the end of the year.

Still, that doesn’t mean that owning an electric vehicle is out of the question for most Americans. Cars like the Chevy Bolt and Bolt EUV offer over 200 miles of real-world range and are priced a bit above a well-specced subcompact crossover. Volkswagen intends to introduce a cheaper, smaller-battery version of its ID.4 crossover, so there are options.

Or maybe it’s smarter to rent.

When it might make sense to rent an EV

Qualifying for the federal tax credit is a simple process; either you are subject to tax or you are not. But things get a bit more complicated if you are a large company with a lot of losses and tax debts. For example, a large bank that underwrites and finances vehicle rental contracts.

Many car manufacturers guarantee the $7,500 tax credit in the leasing of the vehicle. This leads to lower rental costs or rental agreements with better rates or conditions compared to traditional gasoline or hybrid vehicles. In the old days, when state incentives were higher, banks could stack credits and discounts, allowing incredibly cheap rental rates. In the mid-2010s, it wasn’t that hard to find Mitsubishi i-MiEVs, Fiat 500e, and even BMW i3s on lease for around $100 a month or less.

We’ll probably never see fantastic leases like this again, but price-to-price, an EV lease will likely be cheaper than its ICE equivalent. For example, when specified at roughly the same price point and lease terms, a $49,800 Polestar 2 is $115 cheaper to lease than an equivalent Mercedes Benz C-Class.

For many, leasing is a dirty word, but in the world of electric vehicles, that might not be so bad. EV technology seems to be advancing rapidly; in 2012, the i-MiEV and Nissan Leaf struggled to achieve over 60 miles of range and hit 60 MPH in under 15 seconds. In 2022, we have more than a dozen vehicles that can cruise well over 200 miles, and we have big sedans that can embarrass not-so-old supercars with little effort. Letting the bank take care of the depreciation of a vehicle that can quickly become obsolete may not be a bad idea.

There are a lot of holes in our current electric vehicle tax credit system, but if you can play around, then work it to your advantage. I’d rather you do your research now, than jump into an overpriced electric vehicle, banking on a tax credit you mistakenly thought you were entitled to. Read this article, take notes, then be a smart and savvy shopper.

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