Tesla’s Cheapest Model Loses Full Federal Tax Credit Starting January 1

The Biden administration’s attempt to limit Chinese battery components in US electric vehicles has resulted in Tesla announcing that two of its models won’t qualify for the full $7,500 federal tax credit as of January 1, 2024. Tesla’s website has a banner stating that tax credit reductions are likely for certain vehicles in 2024 and urging customers to take delivery by December 31 to qualify for the full claim. The specific two models affected are the Model 3 Rear-Wheel Drive and Model 3 Long Range.

Under IRA rules, vehicles using battery components that are 50 percent made or assembled in the US qualify for the first half of the tax credit, i.e. $3,750. The remaining half of the credit is only available if the manufacturer sources at least 40 percent of their critical minerals from the US or its free trade partners, excluding China. The Biden administration’s latest proposal on IRA credit rules aims to further tighten the clean vehicle tax credit requirements by targeting FEOCs (Foreign Entities of Concern) such as China, Russia, North Korea, and Iran.

In June, the rear-wheel drive Model 3 was able to switch from half the tax credit to the full credit, likely due to a change in supplier or materials to meet the guidelines. However, the latest reversal means the Model 3 will once again only be eligible for half the credit, which may eventually be reduced to zero unless Tesla sources batteries from other countries.