More SUVs Qualify for EV Tax Credits Following Classification Tweak

The saga of the federal electric vehicle tax credit overhaul continues as the Treasury Department announced today that the classification system used to determine if a vehicle qualifies for a credit under the Inflation Reduction Act has been updated. According to the agency’s press release, vehicles will now be classified based on the consumer-facing EPA Fuel Economy Labeling standard rather than the EPA Corporate Average Fuel Economy standard that was previously used to determine if an electric or fuel-cell vehicle is a sedan, SUV, pickup truck or van.

Related: Leased and Used Electric Vehicles Now Qualify for Federal Tax Credits

The EV tax credit guidance currently sets price caps for eligible vehicles based on their classification: SUVs, vans and pickup trucks must not surpass an $80,000 MSRP in order to qualify for the credit, while all other vehicles like sedans, hatchbacks and wagons must not exceed $55,000. The implications of the update mainly concern a set of crossovers that were previously classified as cars under the CAFE standards: the Cadillac Lyric, Ford Mustang Mach-E and two-row Tesla Model Y. The updated guidance means that all three models are now classified as SUVs and subject to the higher price cap of $80,000.

The 2023 Lyriq has a starting MSRP of $64,185, which disqualified it under the previous classification. Meanwhile, both Ford and Tesla recently cut prices on popular EVs like the Mustang Mach-E and Model Y — likely to expand tax credit eligibility and boost demand. After the reclassification today, all Mustang Mach-E and Model Y variants now fall under the $80,000 price cap.

Those who have either purchased or taken delivery of an EV since Jan. 1 can claim the $7,500 tax credit if their vehicle qualifies under the new classification standards, including for those EVs that did not qualify under the previous CAFE standards.

These updates come after several automakers argued the Treasury’s classification system is inconsistent and should be adjusted to match the EPA Fuel Economy Labeling standards. Tesla CEO Elon Musk objected to the IRS’ original classification following the rollout of the new guidance in early January, according to an Automotive News report. Cadillac parent GM also asked the Feds to reconsider.

“We are addressing these concerns with [the Treasury Department] and hope that forthcoming guidance on vehicle classifications will provide the needed clarity to consumers and dealers, as well as regulators and manufacturers,” GM told Reuters in January. Now, the Treasury Department has complied with these requests, opening up eligibility to more electric SUVs.

“This change will allow crossover vehicles that share similar features to be treated consistently,” said the Treasury Department’s statement. “It will also align vehicle classifications under the clean vehicle credit with the classification displayed on the vehicle label and on the consumer-facing website FuelEconomy.gov.”

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