Happy Labor Day! Are you shopping for a car this weekend? Perhaps you should be!
Labor Day is the unofficial end of summer. Many of us are planning one more beach trip, hike, bike ride, picnic, or barbeque this long weekend. Here’s why you might want to add car shopping to your list.
We have previously written about the One Big Beautiful Bill Act (OBBBA or H.R. 1). Today we’re going to revisit the clean vehicle credits. These all expire 9/30/2025. We will also touch on dealer inventory, factory incentives, interest rates, and tariffs. I’ll try not to get too nerdy. Read on, it will be fun, and you might just get a new car!
Credits
Once the clean vehicle credits expire, the earliest we can hope for their return is the next presidential administration.
For individuals, the clean vehicle credits are in IRC Section 30D for new cars and 25E for used cars. Unfortunately, these sections have significant restrictions and limitations. The cars must qualify based on MSRP, parts content, and final assembly. The dealership must complete its IRS paperwork timely. And the individuals claiming the credits must be under income limits. There is an AGI limit of $150,000 for individuals and $300,000 for married filing jointly. This means many of you don’t qualify for the credit even if the car does.
Not to worry, we also have IRC Section 45W. This is the section that allows businesses to claim the clean vehicle credit. Vehicles under 14,000 pounds are eligible for the same $7,500 maximum credit but the credit is subject to fewer restrictions and limitations than the individual credits in sections 30D and 25E. Generally, all electric vehicles under 14,000 pounds, including plug-in hybrids, with a battery larger than 7 kWh qualify for the $7,500 credit. Vehicles over 14,000 pounds require larger batteries but also qualify for larger credits. Would you like to guess which businesses qualify? Your business entity probably does. (Please talk to your LSL tax advisor.) Your leasing company also qualifies.
So, if you fancy an electric vehicle for personal use, you should lease it. If your dealer is treating you fairly, the $7,500 credit should directly reduce the capitalized cost of your lease.
If the electric vehicle will be primarily used for your business, you might consider a purchase. Many electric vehicles exceed 6,000 pounds GVWR. So, you may be able to take 100% bonus depreciation on the full cost of the vehicle less the credit. Mixed business and personal use vehicles have additional complications. (So again, please talk to you LSL tax advisor.)
A final thought on the clean vehicle credits: The IRS issued Fact Sheet 2025-05 last week, which provides some guidance about the 9/30/2025 expiration date. The IRS is now allowing deliveries to occur after 9/30/2025 if a written binding contract is signed and an initial payment is made on or before 9/30/2025. “Binding contract” is a legal term of art. It is unclear what the IRS’s requirements are for a binding contract in this context and how those requirements may be interpreted in the future. We would encourage you not to rely on this guidance.
Inventory and Factory Incentives
We should start with an obvious disclaimer. The new car market is diverse and hyper local. You will encounter differences between brands, models, market areas, and even dealers.
Manufacturers and dealers would all like to sell their electric vehicle inventories sooner rather than later and especially before the end of the credits on 9/30/2025. After the pandemic production slump, most brands’ inventories have recovered to pre-pandemic levels, though tight supplies do exist. Toyota inventory is especially low.
Some brands, including Mercedes and Honda, are offering very generous discounts and lease terms. Other brands may only offer financing incentives, while ignoring consumers’ well-reasoned preference for leases at this time. Time is short, but we still encourage you to cross shop at least two brands, models, and dealers.
Some manufacturer websites show their incentives expiring on Labor Day.
Interest Rates and Tariffs
We are not bond traders or market analysts. So, very few of us were expecting Federal Reserve Chair Powell’s comments and the market’s dramatic reaction last week. We assume that interest rates will be lower in the short term, but many economists believe that tariffs are inflationary. So, we should expect interest rates to rise in the mid-term.
After many months of discussion, tariffs and higher prices are coming to the auto industry. We may see some production shift to North America, but it will take time. Over the next several months, dealers will have fewer pre-tariff cars in their inventories. Price increases will not be uniform. Some brands and dealers will suffer the increases before others.
What does this mean for your car buying decision? Over the mid-term, prices and interest rates are likely to rise. Over the short term, lower interest rates make it easier for manufacturers to continue providing lease and financing incentives to their customers.
Final Thoughts
Credits are expiring. Generous incentives are currently available. Prices and interest rates will likely rise as tariffs kick in.
Sounds like a good time to buy a car!
Happy Labor Day!
If you have any questions about the tax treatment of your next car purchase or lease, please contact your LSL tax advisor.
