The IRS Is Making It Way Too Confusing To Buy An EV With Tax Credits

If you’re an electric car or plug-in hybrid buyer, you’ve probably had a hard 2022. EV buyers have had to contend with seemingly volatile pricing changes, long waits from manufacturers, and now, a reconfiguration of the EV incentive tax code that many have warned would leave buyers of good EVs high and dry. It’s 2023 and the Inflation Reduction Act is supposed to make buying an EV easier, but after talking to the National Highway Traffic Safety Administration and the Internal Revenue Service it seems like the new law is poised to make the adoption of PHEVs and EVs more of a mess than it was, especially in the short term.

Basically, the Inflation Reduction Act, or at least, the EV, PHEV, and alternative fuel (largely hydrogen) portion of the bill, was meant to combat inflation, in part, by stimulating green energy initiatives. It wasn’t an easy bill to get through; the plug-in tax credit portion went through several revisions, with one of the architects of the bill, Senator Joe Manchin, deriding the concept of an EV tax credit entirely, citing high demand for plug-in vehicles. “When we can’t produce enough product for the people that want it and we’re still going to pay them to take it – it’s absolutely ludicrous in my mind,” said Senator Manchin, at a Senate hearing in April 2022. 

On its face, it may have been a little silly to give tax breaks to hyper-expensive cars. Under the old scheme, cars like the $199,999 Lucid Air Grand Touring Performance qualified for a tax credit, but the sensibly priced $27,000 Chevy Bolt EV no longer did. If the goal is to get more people into EVs, that’s not helpful. So, after a lot of political deliberation, and multiple revisions (including a reduction of the initially proposed $12,500 credit for plug-in vehicles), we got the bill we did. President Biden has been open about his goal to get 50% of all new vehicles sold in the United States to be plug-in vehicles by 2030. To reach that goal, the administration wants to invest in EV infrastructure, but also most pertinently, sweeten the pot on the consumer side, to get butts in seats.

When the Inflation Reduction Act was signed on August 16th, 2022, it immediately removed any non-north American-made EV from being eligible for the $7,500 plug-in tax credit, meaning reasonably (comparatively) priced EVs from Hyundai, Kia, Toyota, Subaru, and many more, instantly became more expensive overnight, and with little warning. However, there was a plus side: The new legislation removed the 200,000-unit cap from automakers, so manufacturers like Tesla and GM, which had already produced more than 200,000 cars, were once again eligible for tax credits (which Tesla is likely taking advantage of with recent price cuts). Also, Ford and Ford customers wouldn’t have to sweat bullets waiting for the phase-out period to kick in, since the automaker was on track to hit the 200,000 threshold very soon.

But now that the caps are off, it feels like effectively fewer consumers can take advantage of the tax credit. The tax credit’s revision included a new price cap: trucks, vans, and SUVs are allowed to be sold for up to $80,000, but every other type of car is subject to a lower $55,000 price ceiling. In an age of the crossover, it seems like the bill was aimed right at the crossover-heavy EV lineups of most manufacturers. Yet, now that the official IRS list of qualifying cars is out, consumers and automakers are left scratching their heads as their beloved EV crossover SUV may not actually be an SUV at all, and may therefore be completely ineligible for any tax credit.

Is It An SUV Or Not An SUV?

Plenty of outlets have been open about how dubious the actual definition of an “SUV” actually is. Some vehicles are marketed as SUVs or crossovers, only for the EPA and NHTSA to actually classify them as hatchbacks or station wagons. For example, the Ford Mustang Mach-E is marketed as an SUV, but depending on the year, it’s actually a “station wagon.” Or, the Hyundai Venue, marketed as Hyundai’s entry-level SUV, is actually a hatchback, according to NHTSA. An SUV, or specifically a non-passenger car, typically has pretty cut-and-dry criteria to meet, as the entire auto journalism field has breathlessly covered in years past. The EPA, NHTSA, and IRS seem to be using the same definitions to define SUVdom, so we all foolishly thought that whatever the EPA or NHTSA said is what the IRS would use.

Then, the IRS quietly dropped the list of eligible models in that no-man’s-land between Christmas Day and New Year’s Eve. I’ve sat with the list for a few days, trying to make sense of it, only to realize that it’s kind of a big ol’ game of government Calvinball.

For example, the Volkswagen ID.4 can only reap the benefits of the SUV tax credit benefits in AWD dual-motor form. The Tesla Model Y is only an SUV in 7-seat form, and the Cadillac Lyriq and Ford Mustang Mach-E fall under the “car” $55,000 price cap. Even more maddening, the Ford Escape PHEV is an SUV but its mechanically identical cousin, the Lincoln Corsair PHEV, is a passenger car. (Remarkably, it looks like all RWD, single motor ID.4s will qualify for the lower $55,000 MSRP cap, even with options. The AWD, dual-motor cars would not.)

This conundrum is more than rich-people-problems as it has real implications for consumers patiently waiting for the manufacturer to overcome supply chain issues. For example, the Ford Mustang Mach-E is subject to the $55,000 price cap. As it stands, only the very base Mustang Mach-E select (in RWD or AWD) form qualifies for tax incentives, and the RWD Premium with zero options qualify for tax credits. Even adding a paint color, or specifying AWD on the Mach-E Premium will make it too expensive, and therefore ineligible for any tax credits. It’s a similar story at Lincoln, except the most basic Lincoln Corsair PHEV is maddeningly only slightly under the $55,000 threshold, even adding heated seats would make the Corsair too expensive,  too expensive to even qualify, let alone if you want options like heated seats.

How The IRS Sees A ‘Car’

Using tax forms, and a lot of Google-Fu, I went to work figuring out the method to the IRS’s madness. I also asked them to help explain the process. Here’s what the agency had to say in a fact sheet, published in December 2022:

“How do I know if my vehicle is a truck, van, SUV, or other type of vehicle for purposes of determining the applicable manufacturer’s suggested retail price for a vehicle?”

“The vehicle classifications of vehicles are described in IRS Notice 2023-1. The vehicle classification for this purpose may not match the classification on the fuel economy label or marketing materials describing the vehicle. Vehicle classification information can be found at the Clean Vehicle Qualified Manufacturer Requirements page containing a listing of eligible clean vehicles, including fuel cell vehicles, that qualified manufacturers have indicated to the IRS meet the requirements to claim the new clean vehicle credit beginning January 1, 2023.”

Okay, that makes sense. Like we’ve all said before, the SUV and crossover craze is more marketing than an actual class. IRS Notice 2023-1 points to 40 CFR 600.002, which says this:

“Sport utility vehicle (SUV) means a light truck with an extended roof line to increase cargo or passenger capacity, cargo compartment open to the passenger compartment, and one or more rear seats readily removed or folded to facilitate cargo carrying.”

Clicking “light truck” brings us to this:

“Light truck means an automobile that is not a passenger automobile, as defined by the Secretary of Transportation at 49 CFR 523.5. This term is interchangeable with non-passenger automobile. The term light truck includes medium-duty passenger vehicles which are manufactured during 2011 and later model years.”

Voila! Now we’re getting somewhere. When I reached out to the NHTSA, asking it how it defined an “SUV,” it told me that they don’t have distinct classifications, but used the same guidance that the IRS also pointed to.

And what is this guidance? It’s here. Instead of block quoting again, here’s a screenshot that shows off that dividing line between passenger car and SUV, or more specifically, passenger car and non-passenger car (but also, not a work truck or commercial vehicle)


This isn’t a new phenomenon. It makes sense automakers are going out of their way to get their car-shaped wagons into the light truck category since CAFE and MPG averages are far kinder to light trucks compared to passenger cars. The U.S. Energy Information Administration, which is in charge of tracking energy use, said way back in 2017 that SUVs are blurring the lines, as some are classified as passenger cars, but others are classified as SUVs. With that said, the criteria seemed to be cut and dry, but the more I looked at the list of criteria, the less sense it made.

It appears that to call an SUV an SUV, or specifically, a light truck, many automakers are going the “49 CFR 523.5 section b”-route. In this instance, it appears that to be an SUV, um, er, light truck, the vehicle must have AWD or surpass 6,000 in its GVWR, short for Gross Vehicle Weight Rating. GVWR isn’t curb weight; it’s curb weight and the vehicle’s weight carrying capacity (aka payload). If an automaker wants a vehicle to be considered an off-road vehicle it must satisfy several approach, departure, and breakover angles, and have a minimum ground clearance of 20cm, or 7.87 inches. The easiest way to qualify? Automakers can use three rows of seats that fold flat (or can be removed) as a quick “hey, this thing isn’t a car.”

For big, heavy cars like the Lincoln Aviator PHEV, or Jeep Wrangler 4xe, those are shoo-ins into the off-road light truck class. Same with the Chrysler Pacifica PHEV, it has three rows of seats, so it’s obviously not a passenger car. However, for the smaller, lighter, more low-slung EV shapes, getting into the class is likely harder, taking some clever trickery.

The Tesla Model Y can’t hit the GVWR requirement, and it’s likely too low-slung; it’s hard to find exact numbers for the official approach and departure angle, but Motor Trend and Tesla owners have estimated that it’s somewhere in the 17 to 18-degree range for both front and rear.  In reality, it’s not an off-roader, and its dimensions likely put it out of the “off-road” automobile class. However, if you look at the first half of 49 CF 523.5, it allows vehicles that have three rows of seats that fold flat to qualify as non-passenger automobiles. So, that’s likely the reason why the two-row Model Y is a “car,” but the three-row version is in the higher price bracket. Obviously, Tesla’s lowering of prices helps move more of these cars temporarily into a qualifying category.

The Cadillac Lyriq’s hefty 5,600 lbs should see its payload combination surpass the 6,000 GVWR limit, so it wouldn’t need AWD to be a light truck. However, its ground clearance is low, and I suspect that it can’t satisfy four of the five additional criteria to make an off-road automobile. It’s a two-row car, so it can’t sneak in the back door by being a fake MPV, either. So, it’s a car, according to the IRS.

Okay, those two cars sort of make sense, but then I started looking closer, and realized that the rules aren’t really being applied equally; with the Ford Escape PHEV and Lincoln Corsair PHEV probably being the best example.

The Ford Escape PHEV falls under the SUV category, but it’s unclear why or how. All Ford Escape PHEVs are FWD only, and its 3,900 ish curb weight (and about 1000 lbs payload) put it well under 6,000 lbs GVWR floor. It also only has two rows, so it isn’t a van. If anything, the Lincoln Corsair PHEV’s standard AWD would get it closer to being an SUV.

Yet, things get stranger when you check the EPA and NHTSA websites. Many of the contested models are listed as SUVs, including the Cadillac Lyriq and Lincoln Corsair PHEV. Whether or not they’re actually formally light trucks is a nigh impossible task to ascertain. If manufacturers are really following the 49 CFR 523.5, that would mean that nearly every 2WD crossover would be considered a car, by legal standards. Would most people who buy these vehicles view them as cars? Absolutely not.Whatever the seemingly nonsensical yardstick the IRS is using, it doesn’t seem like the latest revision to the EV tax credit program is really meant to incentivize EV adoption at all. As it stands, only a handful of model lines qualify in all their glory and options; the Chevrolet Bolt EV, Bolt EUV, Nissan Leaf, Volkswagen ID.4, Ford Escape PHEV, BMW X5 PHEV, Jeep Wrangler, and Cherokee 4xE, the Chrysler Pacifica PHEV, and most of the trims available on the Ford F-150 Lightning, except the topmost Platinum, or the Lariat with the extended range battery.

Most other EVs only qualify in base trim with minimal or no options. Some, straight up do not qualify at all.

The news has sent some folks into a tailspin, especially Mach-E hopefuls, who have been waiting for their cars for a while, only to learn that their only slightly-above-base vehicles are now too expensive to qualify for tax incentives. Some are considering canceling their orders. 

Now, there’s a sort of loophole in the credit. Commercial customers don’t have to adhere to any of the plug-in credit rules, including price and national origin, leading many to assume that dealerships can fold that benefit into a vehicle lease, potentially making an EV more competitive.

But, Senator Manchin isn’t all that keen on it, even straight up asking the U.S. Treasury department to disallow that loophole to be used on vehicle leases. 

Arguably, the bill is working as intended, as we’re not incentivizing expensive cars for rich people. However, the average transaction price of a new car has steadily trended upward. Maybe it’s a chicken-versus-egg thing, but consumers are paying more for their cars, partially due to inflation. These days, a buyer in search of a Corsair PHEV, Mach-E Premium, or Lyriq, could be thoroughly middle class. It seems like a program meant to help these buyers, isn’t going to do much.

I reached out to both Senator Joe Manchin and Senator Chuck Schumer’s offices to see if they could explain the discrepancies in vehicle classification, but neither office has provided details beyond a link to previous statements.

It’ll take automakers a while to reach all the requirements in the IRA for the full tax credit (specifically, battery material sourcing), with GM estimating it’ll take three years to fully qualify, which means there’s time for both the federal government and automakers to correct this issue for some vehicles. 

Consumers don’t really care about what the granular definition of SUV or passenger car is. Instead of fostering EV and plug-in adoption, we’ve effectively made it harder for people to buy EVs, with a nonsensical, inconsistent interpretation of a statute that means little to the average American consumer.