IRS Changes Definition of ‘SUV,’ Making More Vehicles Eligible for Tax Credits

The Internal Revenue Service building is seen in Washington, on Sept. 28, 2020. Erin Scott/Reuters

The Internal Revenue Service (IRS) modified the regulatory definition of a sport utility vehicle (SUV) to make more vehicles eligible for an electric vehicle (EV) tax credit of up to $7,500.

In a notice issued on Feb. 3, the IRS and the Department of the Treasury jointly changed the vehicle classification standard by which vans, SUVs, pickup trucks, and some other vehicles are defined, making more models eligible for federal tax credits.

The Inflation Reduction Act (IRA) made SUVs priced at up to $80,000 eligible for the EV tax credit, while cars, sedans, and wagons could only qualify if they were priced at up to $55,000.

The changes mean vehicles that automakers consider crossover SUVs now qualify for the credit.

“Some vehicles that were previously subject to the $55,000 MSRP limitation are now classified as SUVs and therefore get the benefit of the $80,000 MSRP limitation,” the IRS said in a statement, referring to the manufacturer’s suggested retail price (MSRP), not the actual price paid.

For example, this means that the retail price cap for eligibility for the tax credit is raised from $55,000 to $80,000 for models like GM’s Cadillac Lyriq, Tesla’s five-seat Model Y, and Ford Mustang Mach-E. (A complete list of new qualifying clean vehicles can be found here.)

“A very good decision that clears up some EV tax credit confusion and instantly helps customers shopping today (and tomorrow) for an electric crossover or SUV,” said John Bozzella, president and CEO of Alliance for Automotive Innovation, in a statement.

The new qualifications apply to vehicles bought and placed in service on Jan. 1, 2023, or later. For vehicles bought before that date, there are separate qualifying criteria.

Tesla CEO Elon Musk complained in January that tax rules for EVs were “messed up,” with the five-seat version of Tesla’s Model Y not considered an SUV but the seven-seat version considered as one.

The new rules have introduced consistency, making both Tesla models SUVs for purposes of the tax credit.

A Tesla Model Y electric vehicle is displayed on a showroom floor at the Miami Design District in Miami, Fla., on Oct. 21, 2021. Joe Raedle/Getty Images

Details

The IRS and Treasury Department have revised the vehicle classification standard to use the consumer-friendly Environmental Protection Agency (EPA) Fuel Economy Labeling standard instead of the EPA CAFE standard, making it simpler for consumers to identify vehicles that meet the MSRP cap requirements.

Vehicles whose class includes “sports utility vehicle,” “pickup truck,” or “van” on the fuel economy label or on FuelEconomy.gov are considered an SUV, pickup truck, or van, respectively, for the purpose of EV tax credits.

This includes the following vehicle classes, for which the the $80,000 MSRP limit applies:

• small sport utility vehicle
• standard sport utility vehicle
• small pickup truck
• standard pickup truck
• minivan
• van

For tax credit eligible vehicles that are not in one of the classes in the list above, the $55,000 MSRP cap applies.

According to the IRS’s new guidelines, the MSRP for new eligible EVs may not exceed the following amounts for the following vehicle types:

• vans—$80,000
• sport utility vehicles—$80,000
• pickup trucks—$80,000
• other—$55,000

Vehicles whose MSRP exceeds the limitation for that specific vehicle type are not eligible for the tax credit.

The IRS says that all vehicles that were classified as an SUV, van, or pickup truck, for purposes of the new clean vehicle tax credit prior to the Feb. 3rd classification update, continue to be subject to the same $80,000 MSRP cap.

For those vehicles that are now classified as SUVs and are subject to the higher limit, taxpayers should get a seller’s report.

Specifically, a seller must provide to both the taxpayer and the IRS a report that contains the following information:

• name and taxpayer identification number of the seller
• name and taxpayer identification number of the taxpayer
• vehicle identification number of the new clean vehicle
• battery capacity of the new clean vehicle
• verification that the taxpayer is the original user of the new clean vehicle
• the date of the sale and the sales price of the vehicle
• maximum credit allowable for the new clean vehicle being sold
• for sales after Dec. 31, 2023, the amount of any transfer credit applied to purchase
• a declaration under penalties of perjury from the seller

Normally, sellers must provide the report no later than the purchase date of the vehicle. But for vehicles that were previously ineligible, but under the revised rules are eligible, taxpayers can ask sellers to provide the reports after the purchase date.