Tesla’s Cheapest Vehicle To Lose Half Of Its Tax Credit In 2022


Tesla, the renowned electric vehicle manufacturer, recently announced that its affordable Model 3 will no longer be eligible for the full $7,500 federal tax credit starting from January 1, 2022. The company has issued a warning to potential buyers, stating that the tax credit for the Model 3, as well as the long-range variant, will be reduced to $3,750 for deliveries made on or after the specified date. This adjustment is being made due to Tesla’s belief that the battery materials in its electric vehicles will not comply with the sourcing rules set by the Inflation Reduction Act (IRA) by 2024.

Key Takeaway

Tesla’s most affordable electric vehicle, the Model 3, will no longer qualify for the full $7,500 federal tax credit beginning in 2022. The credit will be reduced to $3,750 for deliveries made on or after January 1, due to concerns about the battery materials not meeting the Inflation Reduction Act’s sourcing rules. Tesla is informing customers of this change through a banner on its website, and other Tesla models may also see reductions in the tax credit.

In order to alert customers to this change, Tesla has prominently displayed a banner at the top of its website, hoping to stimulate year-end sales before the credit reduction takes effect. This development comes in the wake of an issued update by the Treasury Department regarding the IRA credit rules, specifically addressing the “foreign entity of concern (FEOC) requirements.” The Treasury Department stated that beginning in 2022, “an eligible clean vehicle may not contain any battery components that are manufactured or assembled by a FEOC.” It has identified China, Russia, North Korea, and Iran as FEOCs.

As a result of this eligibility change, Tesla’s most affordable vehicle, the Model 3, will ultimately cost $35,240 after accounting for the tax credit, but only for individuals who meet the income criteria specified by the IRA. This represents an increase from the previous price of $31,490.

It is worth noting that other Tesla models may also experience reductions in the IRS tax credit. On the order pages for the Model Y and Model X, Tesla warns potential buyers that “reductions” in the IRA credit are likely to occur after December 31.

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