Popular Tesla Models Are Not Eligible For Biden’s New Electric Vehicle Tax Credits

Tesla's Model Y doesn't count as an SUV under the IRS's rules for electric vehicle tax credits, even though other federal agencies agree it is an SUV.

Tesla Model Y
Tesla’s five-seat Model Y is not recognized as an SUV by the IRS. Sean Gallup/Getty Images

On Jan. 1, a slew of electric vehicle tax incentives took effect under the Inflation Reduction Act, allowing up to $7,500 in federal tax rebates on purchases of a wide range of electric or plug-in hybrid vehicles. However, to many EV shoppers’ dismay, most Tesla cars, including some variations of the popular Model 3 and Model Y, are not eligible for any federal tax credits, according to a list published by the Internal Revenue Service (IRS) on Dec. 30. The exclusion is also a disappointment to investors in Tesla, whose shares plunged 70 percent in 2022, and who hoped the new tax rebates could boost sales. Tesla shares closed 12 percent down on Jan. 3 at $108.

Tesla cars excluded from federal tax credits include some Model 3 variations, most Model Y, and all of Model S and Model X.

To qualify for new federal tax rebates, an electric or plug-in hybrid vehicle needs to be assembled in the U.S. and retail for under $55,000 if it’s classified as a passenger car and $80,000 if classified as a truck, van or sports utility vehicle (SUV). Tesla Model 3 Performance, the most expensive Model 3 variation, is not eligible because it starts at $62,990. The less pricey RWD and Long Range versions of Model 3 are eligible for tax credits.

Tesla’s high-end Model S sedan and Model X SUV are both clearly disqualified because they start at $105,000 and $121,000, respectively.

The most controversial exclusion is Tesla’s Model Y, one of the most popular EVs in the market. Although Model Y is considered a SUV by both the Environmental Protection Agency and the National Highway Traffic Safety Administration, the IRS, which ultimately issues tax rebates, classifies it as a passenger car and therefore subjects it to the $55,000 retail price limit under the new tax credit program. None of the standard versions of Model Y are eligible because the cheapest variation, the Model Y Long Range, starts at $65,990.

There is one exception, though. The standard Model Y has five seats, but Tesla offers customers the option to add a third row of seats for $3,000 extra to make the vehicle a seven-seater. The IRS says it recognizes a seven-seat Model Y as an SUV, so, if the final cost of a customized seven-seat Model Y is under $80,000, it’s eligible for the $7,500 federal tax rebate.

However, the IRS’s seven-seat rule doesn’t seem to apply to other carmakers. The 2023 hybrid versions of Audi Q5, BMW X5, Ford Escape and Jeep Wrangler are all classified as SUVs despite the fact they are all five-seat vehicles.

Carmakers need to file an agreement with the IRS in order to be considered qualified manufacturers, but the tax agency doesn’t specify how it categorize vehicle classes. Buyers also need to meet certain income criteria to claim the tax rebates.

Farzad Mesbahi, who runs a YouTube channel about electric vehicle and Elon Musk news, started a petition on Change.com Jan. 1 urging the IRS to modify its rules. The petition has received more than 20,000 signatures.

“This is messed up!” Musk tweeted on Jan. 1 in response to a post by Mesbahi calling out the IRS’s inconsistent classification.

Popular Tesla Models Are Not Eligible For Biden’s New Electric Vehicle Tax Credits