Treasury modifies vehicle classifications in EV tax credit after industry pushback

WASHINGTON — The U.S. Treasury Department on Friday said it has modified how it is classifying vehicles that are subject to price caps in the Inflation Reduction Act's tax credit for consumers buying new electric vehicles.

The department said it will now use the consumer-facing EPA Fuel Economy Label standard to determine whether a vehicle is a sedan, SUV, pickup or van instead of using EPA corporate average fuel economy, or CAFE, standards.

"This change will allow crossover vehicles that share similar features to be treated consistently," Treasury said in a news release Friday. "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."

Consumers who have purchased and taken delivery of vehicles since Jan. 1, 2023, that qualify under the new vehicle classification standard and who satisfy the credit's other requirements can still claim the credit, even if the vehicle didn't qualify under the previous vehicle classification standard, Treasury said.

The tax credit, known as 30D, limits the suggested retail price to no more than $80,000 for new pickups, SUVs and vans, and to no more than $55,000 for other vehicles such as sedans.

The price includes "optional equipment physically attached to the vehicle at the time of delivery to the dealer," according to Treasury. It does not include optional items added by the dealer or destination charges, taxes and fees.

Treasury and the IRS in December sought to help consumers with a new list of vehicles that may be eligible as of Jan. 1 or later. However, the list had raised concerns over how the vehicles are being classified.

Treasury did not classify the Cadillac Lyriq as an SUV, for example, meaning its retail price could not exceed $55,000. The Lyriq, which Automotive News classifies as a midsize crossover, starts at $62,990. Under the new vehicle classification standards announced Friday by Treasury, the Lyriq would be considered a small SUV.

General Motors said last month it was addressing the concerns with Treasury and the department "should leverage existing U.S. government definitions and practices, using criteria and processes similar to that used by" the EPA and the Energy Department.

In a statement Friday, GM said it appreciated Treasury’s alignment with the vehicle classifications on FuelEconomy.gov, noting that qualifying customers now will be able to receive the $7,500 tax credit for the Lyriq.

“The alignment on classification will provide the needed clarity to consumers and dealers, as well as regulators and manufacturers,” GM said.

Another example was Tesla's base Model Y in the U.S. The Model Y's two-row version qualified as a sedan, but the less popular three-row version qualified as an SUV, according to how Treasury was previously classifying vehicles.

Before making substantial price cuts to the Model Y, Tesla CEO Elon Musk complained on Twitter about the classification of the two-row Model Y as a car and urged Tesla fans to complain directly to the IRS.

The Alliance for Automotive Innovation, which represents GM and other major auto companies, said automakers should self-certify to Treasury what classification a vehicle is marketed as, according to comments submitted to the department in November.

“A very good decision that clears up some EV tax credit confusion and instantly helps customers shopping today (and tomorrow) for an electric crossover or SUV,” John Bozzella, CEO of the alliance, said Friday in response to Treasury’s announcement.

Treasury on Friday also said it is still planning to issue proposed guidance on the consumer tax credit's critical mineral and battery component requirements in March after missing its year-end deadline in 2022. Those requirements do not take effect until after the guidance is issued.

The delay and adjustments to vehicle classifications have potentially qualified more vehicles for the full credit in the interim.

However, U.S. Sen. Joe Manchin, D-W.Va., who helped craft the Inflation Reduction Act and EV tax credits, said allowing vehicles to get the credit without meeting the sourcing rules goes against the law's congressional intent.

Manchin introduced legislation last month that would direct Treasury to immediately stop issuing $7,500 consumer tax credits for EVs that do not meet the strict critical mineral and battery component requirements.