More EVs to Qualify for Tax Credit Following Treasury Changes

The expansion is a win for auto industry lobbyists, which had pushed for clarity on the $7,500 purchase subsidy.

More electric vehicles will qualify for a $7,500 tax credit under changes revealed Friday by the federal government, a move that follows pressure from auto industry lobbyists to better define the eligibility requirements. 

The Treasury Department said Friday it was modifying how it classifies vehicles subject to certain price caps set under the Inflation Reduction Act, which made revisions to the subsidy rules. The move effectively expands the population of eligible vehicles. 

As a result, more electric crossovers and SUVs previously not covered by the credit will qualify, the department said.

The changes marked a victory for the auto industry, which had been pressing the government to adjust the eligibility requirements that had initially exempted some models, including versions of the Tesla TSLA 0.91%increase; green up pointing triangle Model Y and Cadillac Lyriq. 

It also comes after Tesla and rival Ford Motor Co. F -7.61%decrease; red down pointing triangle

recently cut prices on their EVs, including on model configurations that under the early guidance would have been too expensive to qualify.

“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 Chief Executive Officer of Alliance for Automotive Innovation, an industry lobbying group.

The Inflation Reduction Act enabled more buyers to tap the credit by removing a cap on the number of vehicles sold per manufacturer, a move that reinstated the credit for Tesla Inc. and General Motors Co. GM -0.89%decrease; red down pointing triangle

models. But the law also adopted several new restrictions, based on vehicle price, taxpayer income and where the model was built. 

For instance, to qualify now, EVs must be assembled in North America, and the manufacturer’s suggested retail price cannot exceed a certain amount. For SUVs, trucks and pickups, the cap is $80,000; for all other vehicles, it is $55,000.

To determine what vehicles are eligible, the Treasury Department initially said it would rely on corporate average fuel economy standards set by the Environmental Protection Agency, which defined some versions of crossovers like Tesla’s Model Y and Ford’s Mach-E as sedans. 

Auto makers and lobby groups pushed back, saying that definition was inconsistent with how other federal agencies classified SUVs and cars. 

Now, classifications will be based on the vehicle label and what is published about models on, the Treasury Department said. 

“This change will allow crossover vehicles that share similar features to be treated consistently,” the department said. 

In January, Tesla slashed the price of its baseline Model Y crossover and the high-end performance version of its Model 3 Sedan to $52,990 and $53,990, respectively, in order for the vehicles to qualify. Ford followed with its own price cut weeks later, dropping prices on the Mach-E

Elon Musk, Tesla’s CEO, had been vocal about the initial eligibility rules, urging customers to comment on it directly to the government. 

“Messed up!” Mr. Musk said last month on Twitter.

The Treasury Department also said Friday that customers who purchased vehicles following Jan. 1 can now claim the tax credit.  

The Inflation Reduction Act also laid out complex requirements aimed at boosting domestic production of EVs and batteries, requiring car companies to assemble them in North America in order for them to be eligible for the credit. The rules stipulate that EVs need at least 40% of critical minerals for batteries sourced in the U.S. or countries that have free-trade agreements with the U.S. That level will rise to 80% by 2026. 

Additionally, 50% of components in batteries must be manufactured or assembled in North America by 2024, with that percentage rising gradually to 100% by 2028. 

The Treasury Department said Friday that guidance on those requirements will be issued in March.

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