The Clean Vehicle Credit Is A Confusing Mess | EVAdoption – The Global Tofay

The Clean Vehicle Credit Is A Confusing Mess | EVAdoption - The Global Tofay Global Today

Hailed as a huge win for auto manufacturers, car dealers, and consumers, the Clean Vehicle Credit (CVC) which is part of Inflation Reduction Act (IRA), at least for now is a confusing, hot mess for everyone involved.

On the positive side, we’ve seen a significant number of new battery factories being announced that will be built in the US in the coming years as a by product of IRA and the Clean Vehicle Credit. However, from a consumer perspective, at least, in the short term, the benefits of the CVC will fall well short of the hype coming from the Biden administration.

Clean Vehicle Credit Background

Part of the intent of the CVC was to correct flaws in the previous tax credit known as IRC 30D, which among other things had a poorly designed cap on manufacturers of 200,000 vehicles. A phaseout of the tax credit occurred over several quarters down to zero. This cap in essence penalized those manufacturers that invested in EVs early, including Tesla and General Motors. The CVC also rightly added caps on adjusted gross income (AGI) and manufactured suggested retail price (MSRP) on EVs. Following are some high-level criteria, but view the more detailed CVC information here:

Buyers modified adjusted gross income (AGI) may not exceed:

  • $300,000 for married couples filing jointly 
  • $225,000 for heads of households
  • $150,000 for all other filers

The credit is nonrefundable, so you can’t get back more on the credit than you owe in taxes.

To qualify for the tax credit, a vehicle must:

  • Have a battery capacity of at least 7 kilowatt hours
  • Have a gross vehicle weight rating of less than 14,000 pounds
  • Be made by a qualified manufacturer. See the IRS index of qualified manufacturers and vehicles.
  • Undergo final assembly in North America
  • The vehicle must be new (there is a separate credit for used EVs)

In addition, the vehicle’s manufacturer suggested retail price (MSRP) can’t exceed:

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

MSRP is the retail price of the automobile suggested by the manufacturer, including options, accessories and trim but excluding destination fees. It isn’t necessarily the price you pay.

The Latest IRS Guidance

On December 29, the IRS released the following: Anticipated Direction of Forthcoming Proposed Guidance on Critical Mineral and Battery Component Value Calculations for the New Clean Vehicle Credit

Until that proposed guidance is issued, the new clean vehicle credit amount will continue to be determined based on the vehicle’s battery capacity, subject to other eligibility criteria, some of which are new or revised by the Inflation Reduction Act. Treasury and the IRS intend to issue proposed guidance on the critical mineral and battery component requirements in March 2023.

But according to Reuters, “electric vehicles leased by consumers can qualify starting Jan. 1 for up to $7,500 in commercial clean vehicle tax credits, a decision that makes those assembled outside North America eligible. But when it comes to purchases, the new Treasury guidance does not change the definition of what constitutes North American assembly.”

So apparently at least for a few months, EVs not assembled in North America but otherwise qualify for the CVC, are eligible to apply the maximum $7,500 tax credit to a lease, but not a purchase.

Confused yet?

So again the good news, at least until some date in March, is that any electric vehicle that meets all of the other (non critical mineral and components) requirements such as minimum battery size, being assembled in North America, and that falls under the MSRP caps — will qualify for the full $7,500 tax credit when purchased.

But there’s another area that turns the CVC into even more of a confusing hot mess — vehicle segment definition.

IRS Definition of “SUV” is a Mystery

It makes little sense (other than to provide a favor to the auto manufacturers) to have a higher MSRP for less efficient, SUVs, vans, and trucks then for sedans. But the IRS definition of what constitutes an SUV is extremely confusing. (Editor note: On December 29 I reached out to my contact at the IRS asking for clarification, but have yet to receive a response.)

On December 28 the IRS launched a table “Index to Manufacturers” that reveals whether an EV is subject to the Clean Vehicle Credit MSRP cap of either $80,000 (SUVs, vans, and trucks) or $55,000 (“Other”). As of January 2, 2023 there is only model information from 10 OEMs. But for those with model information, there is no simple definition on what criteria the IRS is using to determine whether an EV is or is not an SUV.

For example, the Tesla Model Y 5 seater is not an SUV but the 7 seater is an SUV. And with Ford, the Escape PHEV is classified as an SUV, but the Lincoln Corsair PHEV which is based on the Escape, is not.

There are theories about weight, but that can’t be it as the Corsair AWD PHEV weighs 4,397 pounds, while the Escape AWD PHEV weighs 3,668 pounds.

Other theories include interior cargo volume. But that too does not seem to hold water as the Model Y 5-seater has more cargo volume than the 7-seat version as well as having more than either the Escape and Corsair.

Further the Audi Q5 TFSA e Quattro PHEV and BMW X5 xDrive45e PHEV are considered SUVs, whereas the Cadillac Lyriq is considered something else, in the IRS “Other” category.

The Clean Vehicle Credit Is A Confusing Mess | EVAdoption - The Global Tofay Global Today
The Clean Vehicle Credit Is A Confusing Mess | EVAdoption - The Global Tofay Global Today

And all of these vehicles are classified as SUVs by the EPA, so the IRS is clearly using different criteria.

Another criteria suggested by some is ground clearance, but unless the numbers we found in the chart below are incorrect, that would not be the key criteria either. And another theory is the vehicle having All-Wheel Drive (AWD). But the Tesla Model Y AWD has AWD and is not considered an SUV whereas the Ford Escape PHEV is considered an SUV but only has Front-Wheel Drive (FWD).

The Clean Vehicle Credit Is A Confusing Mess | EVAdoption - The Global Tofay Global Today

Perhaps We Found the Answer

So after all of this, someone shares an explanation of the definition on Twitter which is based on FHWA/DOT definition of a non-passenger vehicle. The first criteria is if the vehicle has 3 rows of seating, which would explain why the Tesla Model Y with 3-rows qualifies, but the other Model Y variants do not.

The Clean Vehicle Credit Is A Confusing Mess | EVAdoption - The Global Tofay Global Today

The second way a vehicle can be classified as an SUV is if it has 4-wheel driver OR has a gross vehicle weight of more than 6,000 pounds. However, if it weighs more than 6,000 pounds it must also have 4 of the 5 characteristics listed in the screenshot below, which includes ground clearance of 7.87 inches.

The Clean Vehicle Credit Is A Confusing Mess | EVAdoption - The Global Tofay Global Today

But then applying these criteria to the Ford Escape PHEV, it isn’t clear to me how it is classified as an SUV? The Escape PHEV does not:

  • Have 3 row seating
  • Have 4WD/AWD (Ford = Front Wheel Drive or available Intelligent All-Wheel-Drive (not available on Plug-in Hybrid))
  • Weigh more than 6,000 pounds.

Stay Tuned …

At this point my head is spinning and hurts as just when I think I might have it figured out, something doesn’t seem to fit. Anyway, I hope to hear back soon from the IRS and make sense of how they are defining what is and what is not SUV and will share an update if/when I do.

But so why is this classification criteria such a big deal? Well many people were counting on the tax credit for the Tesla Model Y or Cadillac LYRIQ, but unless you opt for the 7 seat version of the Model Y, neither vehicle is eligible because they exceed the $55,000 MSRP cap. Now once the IRS issues its final guidance on the battery mineral and component requirements in March, most of these vehicles will likely only qualify for $3,750, if anything.

Stay tuned.

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