SUV or Car? IRS Changes EV Tax Credit Eligibility with Updated Classifications

The US Treasury Department has updated the classification of some electric vehicles (EVs) in relation to the application of tax credits. The reclassification means that some models that were previously classified as cars are now considered SUVs, which can qualify for $7,500 in tax incentives, increasing to $80,000 in manufacturer suggested retail price (MSRP) from the previous $55,000 for cars.

The Treasury's decision to reassess how it classifies electric vehicles for applying electric vehicle tax credits came after consumers and automakers convinced the department to use the consumer-facing Environmental Protection Agency (EPA) Fuel Economy Labeling standard rather than the EPA Corporate Average Fuel Economy (CAFE) standard. The change aims to treat crossover vehicles with similar features consistently.

The eyebrows were raised when Treasury first announced which vehicles would and would not qualify for EV tax credits under expanded legislation proposed in the Inflation Reduction Act on December 29. Consumers noticed that the Internal Revenue Service's (IRS) list of qualifying vehicles was inconsistent. Some Tesla Model Ys were eligible for tax credits, while others were not, and the rear-wheel-drive Volkswagen ID.4 was considered a car, while the all-wheel-drive version was considered an SUV.

The inconsistency was due to how the Treasury had decided to classify vehicles, using definitions provided under the CAFE ratings, which were determined by the EPA. However, these differed from the classifications in consumer-oriented EPA documents. Therefore, although the EPA had defined all ID.4s as SUVs on its website, it did not when it came to determining CAFE compliance.

The distinction between SUVs and other vehicles matters because cars are only eligible for $7,500 federal EV tax incentives if their MSRP is lower than $55,000. Larger vehicles, meanwhile, can qualify for incentives if their MSRP is lower than $80,000. The MSRP is defined by the IRS as "the base retail price suggested by the manufacturer, plus the retail price suggested by the manufacturer for each accessory or item of optional equipment physically attached to the vehicle at the time of delivery to the dealer." It does not include taxes, dealer add-ons, or delivery charges, and all vehicles must have their final assembly accomplished in North America.

Under the new rules, the following vehicles now qualify for incentives of up to $80,000 in MSRP:

• Ford Mustang Mach-E
• Cadillac Lyriq
• Lincoln Corsair Grand Touring
• Tesla Model Y Long Range - 5 seat (2-rows)

• Tesla Model Y Performance - 5 seat (2-rows)
• Volkswagen ID.4 (all ID.4s now qualify)
• Volkswagen ID.4 Pro S
• Volkswagen ID.4 S

The Treasury Department notes that all consumers who purchased an electric vehicle as of January 1, 2023, will be able to claim the credit as defined by these new standards, even if their vehicle did not qualify according to the previous CAFE-based rules.

However, despite the Treasury's clarification, some uncertainty remains, particularly with regard to which vehicles will qualify for incentives based on the origin of the minerals used in the production of their batteries. Guidance on this issue is set to be released in March. It is still unclear which vehicles will qualify for incentives when the Treasury announces the rules.