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Why Tesla’s Model Y might not be eligible for the new EV tax credit

Why Tesla’s Model Y might not be eligible for the new EV tax credit

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Tesla’s five-seater Model Y is too underweight and overpriced to qualify for the $7,500 tax credit, and Tesla fans (and Elon Musk) are not happy about it.

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An assembly line of Model Y vehicles being built at the Texas Gigafactory.
An assembly line of Model Y vehicles being built at the Texas Gigafactory.
Photo by Loren Grush / The Verge

If you were waiting until after New Year to pick up a Tesla Model Y in hopes it’d qualify you for the new federal tax credit, you might be in for a disappointment. The IRS released a 2023 list of vehicles that qualify for the new $7,500 incentive, and while Tesla’s popular SUV is on it, the most common five-seater versions won’t be eligible.

According to EPA classifications, all versions of the Tesla Model Y are supposed to be under the “small SUV” category. But it would seem the IRS is treating five-seater and seven-seater models differently for tax eligibility, the former being treated as a car and the latter as an SUV.

As a result, the five-seater Model Y’s MSRP price cap for tax credit eligibility becomes $55,000, the same category that includes smaller EVs like the compact hatchback Chevy Bolt. And since the Model Y Long Range starts at $65,990, that makes it not currently eligible for the $7,500 credit.

Tesla CEO Elon Musk tweeted that the disqualification is “messed up” in a reply to a Tesla fan comparing a qualifying plug-in hybrid Jeep to the Model Y. Another tweet that Musk replied to says that the Model Y is specifically “238 pounds too light” to be considered an SUV. “Penalized for making our SUV too mass-efficient? That is bizarre,” Musk wrote.

The IRS does use weight to determine if a truck or SUV is eligible for certain business deductions, but that isn’t applying here. If the IRS were to use those weight specifications for the clean vehicle tax incentive eligibility, then many cars (including Model Y) would not reach the 6,000 gross vehicle weight rating to be classed as an SUV. Tesla specifies the Model Y has a curb weight of about 4,403 pounds.

It’s not clear what the IRS is doing to categorize vehicle classes for the tax incentive, and even automakers are telling experts it doesn’t make sense. “None can explain how IRS came up with this seemingly random list,” Guidehouse Insights principal analyst Sam Abuelsamid emailed The Verge. “Their understanding is that the car/SUV classification should be based on the EPA certification classification.”

But the IRS does not appear to be using the EPA’s data. The seven-seater Model Y jumps to the applicable MSRP limit of $80,000, which makes those versions eligible for the tax incentive. The seven-seat option adds $3,000 to the Model Y Long Range’s price but cannot currently be configured with Model Y Performance trims — making those ineligible as well.

There are other curiosities that fall on the IRS list of clean vehicles. For example, several versions of the Ford Mustang Mach-E aren’t eligible due to being given a $55,000 cap, while the slightly smaller Ford Escape Plug-in hybrid gets the $80,000 limit. Abuelsamid also points out that the Lincoln Corsair Grand Touring, which uses the same body as the Escape, falls under the $55,000 group instead.

It would seem that Tesla and other manufacturers will have to make some changes to fall in line with the new clean vehicle qualifications, should it stick. The agency did open a public request for comment on the matter, which will close on February 28th.

It could be tough for Tesla specifically if the IRS leaned into other federal specifications, like vehicles needing a have a ground clearance that’s 20 centimeters or higher to be an SUV. Imagine if the automaker had to give Model Y a lift / add air suspension like with the Model X, or make the car heavier. One thing Tesla could do instead, however, is just reduce the price of its EV.

Correction January 4th, 2023, 1:08PM ET: A previous version of this article incorrectly connected the IRS’ gross vehicle weight ratings to EV tax credit eligibility. An analyst quote was also added.