Tesla fights for EV credits after key model left off SUV list

Tesla CEO Elon Musk is crying foul after the IRS left the most popular EV in America off the preliminary list of vehicles qualifying for the new EV tax credit. And Tesla fans are urging the automaker to make creative product changes to get the base version of the Model Y back on the list.

"Messed up!" Musk wrote on Twitter Tuesday in response to a post by a Tesla fan complaining about preliminary IRS guidance.

The Tesla fan pointed out that a Jeep Wrangler 4xe — a plug-in hybrid with just 21 miles of electric range — qualifies as an SUV for the tax credit, while the five-seat Model Y with 330 miles of electric range does not.

The IRS document — titled "Manufacturers and Models for New Qualified Clean Vehicles Purchased in 2023 or After" — stipulates the vehicles that qualify for credits as SUVs and pickups with a price cap of $80,000, and the vehicles that qualify as passenger cars with a lower $55,000 price cap.

The base Model Y in the U.S., which comes with two rows and seating for five, has a starting price of $65,990 before shipping charges. Since the vehicle exceeds the $55,000 price cap, the entry version is not eligible for the EV tax credit of up to $7,500.

The tax credit is part of the Inflation Reduction Act signed into law in August. New provisions for EV incentives took effect on Jan. 1, including price caps based on vehicle type and income caps for buyers.

In a curious twist, the Model Y's less popular three-row version qualifies as an SUV under the new IRS guidelines and therefore is eligible for the tax credit with a price cap of $80,000. The seven-seat Model Y, with a tiny third row, starts at $68,990 before shipping. But the Model Y Performance, with only two rows and a $69,990 sticker, does not qualify for the EV credit.

It's unclear exactly which set of rules the IRS is using to define SUVs, according to analysts. The EPA defines the Model Y as a "small SUV" for all versions, while a separate set of government rules defines SUVs by gross vehicle weight, off-road capability or the presence of a third row of seating.

"Our federal government kind of screwed up on this one," said Loren McDonald, CEO of the analysis and consulting firm EVAdoption. "Nothing on this is clear yet. And if this is final, it's not at all aligned with the EPA definitions."

To be sure, the Treasury Department said the rules are still being developed and subject to change. Those rules cover a variety of technical issues related to the tax credit, including price caps, vehicle classifications and the sourcing of EV batteries.

The stakes are high for Tesla since it is the biggest EV brand in the U.S. by far — and the Model Y is its top-selling vehicle. Tesla lost access to the previous version of the EV credit in 2020 because the automaker had hit its quota of 200,000 EV sales under the old rules.

Other EV makers are also affected by the IRS rules. According to the preliminary IRS guidance, the Ford Mustang Mach-E qualifies as a car even though Ford markets it as an SUV. The starting price of the Mach-E is $46,895 before shipping but higher trims reach to $69,895, above the $55,000 price cap for cars under the preliminary IRS guidance.

In another Twitter post, Musk urged his 125 million followers to write the IRS on the matter. The tax agency is requesting public comment on the credit rules as it rushes to meet the March deadline for final rules.

"Penalized for making our SUVs too mass-efficient? That is bizarre," Musk wrote in response to another Tesla fan. The Twitter user DrKnowItAll speculated that the two-row Model Y failed to qualify as an SUV, in part because its gross vehicle weight comes in under the 6,000-pound gross vehicle weight threshold under one set of government regulations.

The fan suggested a change to the Model Y in order to qualify. "Solution: attach lead weights totaling 250 lbs to interior rear under-truck via hex bolts. After the sale is complete, provide free-of-charge first service to remove said weights."

Other Twitter users suggested Tesla could raise the suspension of the Model Y so it could qualify as an SUV based on improved off-road abilities. Or, more simply, Tesla could sell the three-row version of the Model Y at the same price as the two-row version and recycle the seats. In this scenario, a new owner would send the seats back to Tesla for reuse.

There were also more serious suggestions. "The solution is to increase the battery pack slightly," wrote Twitter user DavidMavis11. "Makes the range increase above everyone else's and solves the weight issue."

Staff Reporter Audrey LaForest contributed to this report.