The Feds Make More EVs Eligible For $7,500 Tax Credit

The US Treasury Department announced Friday it has modified the classification rules for electric vehicles that are subject to price caps in the Inflation Reduction Act's (IRA) $7,500 tax credit. Here's what changing: the treasury will now use the consumer-facing EPA Fuel Economy Label standard to decide whether a vehicle is an SUV, truck, van, or sedan.

Previously, the rules were based on the EPA corporate average fuel economy (CAFE) standards as the deciding factor. "This change will allow crossover vehicles that share similar features to be treated consistently," the Treasury said in a press release. "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."

Five vehicles previously classified as sedans are now being moved to the SUV category, which has a higher price tag limit, meaning consumers will be able to take full advantage of the federal tax credits. Ford, GM, and Tesla were among the automakers pressuring the federal government to update the vehicle classifications after the rules were first introduced last fall. SUVs, for example, were previously able to be priced up to $80,000 to qualify for the credits.

Meanwhile, sedans, wagons, and traditional cars could only be priced up to $55,000. Now, the rule raises the retail price cap to $80,000, previously $55,000, for these vehicles: Cadillac Lyriq, Ford Mustang Mach-E, Ford Escape Plug-in Hybrid, Tesla Model Y, and the Volkswagen ID.4. Those who already purchased electrified vehicles based on the previous guidelines can now claim the credit.

"Customers who have purchased and placed in service vehicles since January 1, 2023, that qualify under the EPA Fuel Economy Labeling classification standard announced today and who satisfy the other clean vehicle tax credit requirements can claim the credit, including customers with vehicles that did not qualify under the prior EPA CAFE standard," the announcement confirmed. "All vehicles that were eligible under the MSRP limitations prior to today's notice remain eligible under the updated standard. Updated information about the MSRP limit that applies has been posted to IRS.gov."

The Treasury's new rules will certainly delight automakers, but not everyone will be pleased. Senator Joe Manchin, chairman of the Senate Committee on Energy and Natural Resources, introduced a bill last month seeking to impose battery sourcing requirements on electrified vehicles in order to qualify for the $7,500 tax credit.