The Treasury Is Changing How It Classifies Cars to Make EV Tax Credits Apply Fairly

Photo: Mandel Ngan (Getty Images)

The U.S. Treasury Department is modifying its vehicle classifications after being criticized for using older standards that no longer apply to new vehicles. The Treasury relied on corporate average fuel economy (CAFE) standards to classify vehicles into segments, but these rules often place vehicles into different segments than intended, which is affecting the eligibility of certain models for EV tax credits under the Inflation Reduction Act. Treasury is now dropping the old CAFE standards and switching to EPA Fuel Economy Labeling, which could make more EVs eligible for federal tax credits, according to Automotive News.

The segments that a new EV fits into is just a part of the equation; the vehicle’s price also factors in, and both classification and cost go hand-in-hand when the IRS determines tax credit eligibility. The Inflation Reduction Act set price limits at $80,000 for new trucks, SUVs and vans. Sedans and other vehicles must cost no more than $55,000 to qualify. Keep in mind, this applies to the car’s MSRP and any optional equipment installed at the factory; it doesn’t count equipment installed by dealers nor factor in destination charges, taxes or fees.

Classifying EVs should be pretty straightforward, but CAFE standards could blur the lines between segments. So, Treasury will rely on widely-known EPA Fuel Economy labels instead. These are closer to what buyers recognize, and to how some automakers market their EVs. That’s a whole other can of worms, but AN says classifications will be clearer now, especially for crossovers:

The department said it will now use the consumer-facing EPA Fuel Economy Labeling standard to determine whether a vehicle is a sedan, SUV, pickup or van instead of using EPA corporate average fuel economy, or CAFE, standards.

“This change will allow crossover vehicles that share similar features to be treated consistently,” Treasury said in a news release Friday. “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.”

Auto News cites the Tesla Model Y as an example of the confusion under CAFE: A Model Y with two rows of seats would be classed as a sedan, but a Model Y with three rows would be an SUV. Same car, different price caps. Elon Musk even told the Tesla faithful to complain to the IRS about the murky segments.

The Cadillac Lyriq is another example, which the Treasury failed to classify as an SUV. That put the Lyriq in a class closer to that of the Chevy Bolt, which is nonsense. The Bolt is easily under the $55,000 price cap for sedans and other vehicles, but good luck finding the Lyriq for less than $55k.

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Putting aside the question of whether someone buying a new Cadillac EV needs a government subsidy at all, it’s clear the Lyriq and Bolt have little in common. And if EV adoption is the point behind the IRA tax credits, the Lyriq could be given a fair chance with a higher price limit than its cheaper GM cousin.

Since the classification rules are just coming into effect, recent EV buyers could be left out. But the Treasury is making the standards retroactive, so that anyone who bought an EV and took delivery since January 1 can take advantage of the change, and could, hopefully, look forward to a generous return come tax time.

Photo: Craig Hudson (Getty Images)