IRS reclassification of some crossover vehicles may make them eligible for new clean vehicle credit

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People who bought certain electric vehicles earlier this year might have thought they were priced out of the new clean vehicle credit. However, a revised definition for “sports utility vehicles” effectively increases the price ceiling for several models.

Price caps limit new clean vehicle credit

Vehicle classifications matter because the new clean vehicle credit does not apply when the manufacturer’s suggested retail price (MSRP) for a model is more than:

• $80,000 for a van, SUV or pickup truck; or
• $55,000 for any other vehicle (sedans and passenger automobiles).

Thus, the credit may depend on whether a model qualifies for the $80,000 MSRP ceiling, or it falls into the less expensive “other vehicle” category.

Change reclassifies several crossover vehicles as SUVs

The IRS originally classified the following vehicles as “other vehicles” subject to the $55,000 MSRP cap. However, these vehicles are now considered SUVs that are subject to the $80,000:

• 2023 Cadillac Lyriq
• 2022 and 2023 Ford Mustang Mach-E
• 2022 and 2023 Ford Escape Plug-In Hybrid
• certain variants of the 2022 and 2023 Tesla Model Y, and
• certain variants of the 2022 and 2023 Volkswagen ID.4.

Fuel economy classifications replace CAFE classifications 

These models became SUVs when the IRS decided to use a different set of regulations to classify vehicles. On February 4, the IRS said it will rely on regulations the Environmental Protection Agency (EPA) uses for fuel economy labels (40 CFR 600.315-08). 

This reversed a decision the IRS made in late 2022, when it announced it would classify vehicles according to the EPA regulations for determining corporate average fuel economy (CAFE) standards (40 CFR 600.002). Significantly, the CAFE standards classify most “crossover” vehicles as passenger vehicles, even though they are usually marketed as SUVs.

The Treasury Department explained that using the fuel economy label regulations aligns the credit classifications with the customer-facing information on vehicle stickers and the FuelEconomy.gov website. It also provides more consistent classifications of crossover vehicles that share similar features. According to multiple press reports, the change also followed lobbying from several manufacturers and automotive industry groups.

Affected buyers should contact their dealers

A buyer who bought one of the reclassified models before February 4 should contact the dealer if the MSRP was between $55,000 and $80,000. The dealer should issue a new seller’s report, which provides information the buyer will need to claim the credit.