Tesla now says two Model 3 variants will lose full US tax credit next year

Tesla has reinterpreted the new guidelines from the Biden administration regarding the US federal tax credit. The company is now saying both the Model 3 Rear-Wheel Drive (RWD) and Long Range (LR) variants will lose the full $7,500 tax credit on January 1, 2024.

Introduced through the Inflation Reduction Act (IRA), the Clean Vehicle Tax Credit offers savings of up to $7,500 on purchases of new electric vehicles (EVs). However, EV manufacturers must meet specific criteria related to the origin of the vehicle and its battery, as well as the sourcing of materials, before the credit applies. Last month the Department of the Treasury introduced new guidelines for tax credits, which says that starting next year “an eligible clean vehicle must not incorporate battery components manufactured or assembled by a Foreign Entity of Concern (FEOC).” According to The Department of Energy, FEOCs are entities that are “owned by, controlled by, or subject to the jurisdiction or direction of” governments such as China, Russia, North Korea, and Iran.

When the updated guidelines were introduced last month, Tesla initially warned that the Model 3 RWD and LR cars would see their tax credit halved from $7,500 to $3,750 starting on January 1, 2024. Now the company says it will actually be removed entirely.

According to internal communication to employees obtained by Drive Tesla, the automaker explains the tax credit for these cars will end “based on [our] current interpretation of the recently updated IRA guidance.” As a result, the online configurator has been updated to warn of this change, encouraging customers to take delivery by December 31, 2023 to receive the full $7,500 credit.

tax credit
Credit: Tesla

In these internal communications, Tesla also confirmed the Model 3 Performance will retain the full $7,500 tax credit. This is interesting because also starting on January 1, 2024, the tax credit will become a point of sale (POS) rebate, meaning it will actually be cheaper to purchase the Performance than the LR variant of the Model 3 ($50,990-$7,500=$43,490 vs $45,990).

As for their other vehicles, Tesla says all three variants of the Model Y are expected to keep their full $7,500 tax credit, along with the Model X LR.

Here is a full list of Tesla vehicles eligible for the US tax credit, and the amount.

  • Model X Long Range: $7,500
  • Model 3 RWD: $7,500
    • Not eligible for tax credit starting January 1, 2024
  • Model 3 Long Range: $7,500
    • Not eligible for tax credit starting January 1, 2024
  • Model 3 Performance: $7,500
  • Model Y RWD: $7,500
  • Model Y LR: $7,500
  • Model Y P: $7,500
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