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

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

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People who bought some electric cars earlier this year may have thought they were priced out of the new clean car credit. However, the revised definition of “SUV” effectively increases the price cap for many models.

Price caps limit credit for new clean vehicles

Vehicle ratings are important because the New Clean Vehicle Credit does not apply when the Manufacturer’s Suggested Retail Price (MSRP) of the model is more than:

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

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

The change reclassifies many 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 subject to the $80,000 mark:

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

Fuel economy ratings replace CAFE ratings

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 would rely on regulations used by the Environmental Protection Agency (EPA) for fuel economy labels (40 CFR 600.315-08).

This overturned a decision made by the IRS in late 2022, when it announced that it would classify vehicles according to EPA regulations for setting corporate average fuel economy (CAFE) standards (40 CFR 600.002). It is worth noting that CAFE standards classify most “crossover” vehicles as passenger cars, even though they are typically marketed as SUVs.

The Department of the Treasury explained that the use of fuel economy label regulations aligns credit ratings with customer-facing information found on vehicle labels and the FuelEconomy.gov website. It also provides more consistent ratings for crossovers that share similar features. According to multiple press reports, the change also came after pressure from several manufacturers and auto industry groups.

Affected buyers should contact their dealers

A buyer who purchased one of the rebadged models before February 4 should contact the dealer if the MSRP is between $55,000 and $80,000. The agent must issue a new seller report, which provides the information the buyer will need to claim the credit.

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