IRS Rules on Eligibility of Tesla EVs for $7500 Tax Credit - Model Y vs. Ford Escape PHEV
The Internal Revenue Service (IRS) has recently published the list of electric vehicles (EVs) that are eligible for the upcoming $7,500 tax credit brought about by the Internal Revenue Act (IRA). The tax credit will go into effect on January 1, 2023 and according to the list of eligible EVs only the Tesla Model 3 and Model Y will qualify for the federal subsidy. However, not all variants of the Model Y are considered an SUV, which comes with a higher MSRP limit.
Tesla has active efforts to reduce manufacturing costs in order to make their vehicles more affordable. This may allow the price of these low-end models to qualify for the tax credit in the future if inflation abates. It isn't clear to me if the IRS rules allow automatic inflation adjustment.
In Canada, Tesla used a similar stratagem to be eligible for subsidies. They sold the model 3 at a lower price with a battery pack that had half of its capacity software-locked. An aftermarket option was offered to unlock the battery.
It seems that Tesla's cost reduction strategy for now is not to cut price but to increase gross margin. That may change with increased competition but I don't see this happening significantly in 2023. In this case, the easier thing to do would be to make the third row standard so that all buyers can get the $7500. Then allow after-sale service to remove the seats for buyers who don't actually want them.
The Internal Revenue Act law states that no credit shall be allowed for a vehicle with a manufacturer's suggested retail price in excess of the applicable limitation. For vans, sport utility vehicles and pickup trucks, this limit is set at $80,000 while any other vehicle is limited at $55,000.
It would be pretty annoying to have to buy the 7 row Y just to get a tax credit as it would require Tesla to cut the price of the base model Y LR ($65,990) by $11K to get it under the $55K. This would anger existing customers who feel they were tricked into paying more when Tesla knew they were going to drastically reduce the price.
Existing customers got the deal they wanted at purchase time and what happens later with others is really none of their business. It’s about selling new vehicles and Tesla won’t have much of a choice if other manufacturers start gobbling up sales because they priced themselves into the incentive.
It appears that it's not about 5-seats vs 7-seats but rather weight as Ford Escape PHEV is classified as an SUV and weighs 3870 lbs while Model Y LR 5-seater weighs 4416 lbs and is not classified as an SUV.
So it looks like no one that bought a 2020 Model Y (regular or LR) will get a tax credit as they would have to buy a brand new 2020 Model Y in 2023 which is unlikely. Early Dec buyers got a $3750 credit while late Dec buyers got a full $7500 credit, where-as only the 7-seat variant will get the $7500 credit in 2023, while all others get nothing. Time will tell if Tesla implements some changes to make all 2023 Ys qualify.
What Tesla models qualify for the US tax credit?
The Tesla Model 3 Rear Wheel Drive and Long Range, as well as the Model Y All-Wheel Drive – 7 seat variant (3-rows) and Long Range – 7 seat variant (3-rows) and Performance – 7 seat variant (3-rows) all qualify for the US tax credit, with respective MSRP limits of $55,000, $80,000, and $80,000.
Will the basic model Y (2-rows) qualify for the US tax credit?
Not currently, as their starting price is around $65k. However, Tesla has active efforts to reduce manufacturing costs which may allow the price of these low-end models to qualify in the future if inflation abates. It isn't clear to me if the IRS rules allow automatic inflation adjustment.
Is it about the tax you owe when filing taxes?
No, it's about your yearly tax liability. You may be paying throughout the year via employer's withholding every pay period, which most of us do, and in the end you may not owe anything when filing taxes or even get a refund. But you still get $7,500 if your income was such that you had to a total of at least $7,500 in federal tax.
Does Tesla have an after-sale service to remove seats?
It seems that Tesla has not yet figured out this part.
Will Tesla cut the price of the base model Y LR ($65,990) by $11K to get it under the $55K?
I seriously doubt they will do that big a cut, at least in the next couple of months. The base standard range version ($59,990), if they offer it, would require a $5K price reduction and would qualify but you could not add on a different color choice or seat color choice or Tow package. If you did, they would count in the MSRP calculation taking it over the $55K limit.
Is this ruling challengeable under the IRA law?
Yes, according to the law as written no credit shall be allowed for a vehicle with a manufacturer's suggested retail price in excess of the applicable limitation. The applicable limitation for each vehicle classification is as follows: vans - $80,000; sport utility vehicles - $80,000; pickup trucks - $80,000; other - $55,000. The Secretary shall prescribe such regulations or other guidance as necessary for determining vehicle classifications using criteria similar to that employed by the Environmental Protection Agency and Department of Transportation.
Will any 2020 Model Y buyers get a tax credit?
No, nobody who bought a 2020 Model Y (regular or LR) will get a tax credit.
Is there any way to get the tax credit if I already bought a 2020 Model Y?
Unfortunately, no. The IRS rules are very clear that only vehicles purchased after December 31, 2019 qualify for the tax credit.