Buyers of Tesla’s most affordable model, the Model 3 sedan, will no longer be eligible for the $7,500 U.S. electric vehicle tax credit starting next year, at least when it comes to the Rear-Wheel Drive and Long Range versions.
The news comes from Tesla itself, which already updated its website to reflect the change, likely as a result of the updated Inflation Reduction Act guidance that was announced at the beginning of the month.
Previously, the electric automaker had a slightly different language on its webpage, instructing potential buyers to take delivery of their new Model 3 before the end of the year because starting from 2024, the RWD and Long Range variants of the EV might benefit from just half of the tax credit.
However, things have changed and buyers of the sedan’s two cheapest options will no longer be eligible for the $7,500 incentive at all. With this being said, the Performance trim doesn’t seem to be affected by this change, at least for now.
Here’s what Tesla says on its website regarding the change:
Customers who take delivery of a qualified new Tesla vehicle and meet all federal requirements are eligible for a tax credit up to $7,500. Tax credit will end for Model 3 Rear-Wheel Drive and Model 3 Long Range on December 31, 2023 based on current view of new IRA guidance. Take delivery by December 31 to qualify for full tax credit.
Currently, all the Model 3 trims, the Model X Dual Motor, and the Model Y Long Range and Performance are eligible for the full $7,500 tax credit. That said, there are price caps in place: $55,000 for the Model 3 and $80,000 for both the Model X and Model Y.
In the case of the Model Y, Tesla says that reductions in the tax credit are likely after December 31. However, there is no such language when it comes to the Model X, which incidentally has a starting price of $79,990–just $10 under the $80,000 price cap.
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Most likely, the change that affects Tesla’s most affordable model has to do with the fact that it’s powered by Chinese-made batteries, but the company hasn’t released details on why the two Model 3 variants are losing the entire tax credit eligibility. The updated tax rules state that any vehicle containing battery components from a so-called “foreign entity of concern” (FEOC) like China will be disqualified from receiving tax breaks.
Ultimately, it's certainly not great news for Tesla, which saw record-breaking growth this year—and the continued domination of the U.S. market—thanks to the affordability of the Model 3 and Model Y. It's possible Tesla could cut prices further to compensate, but its investors are already nervous about these changes cutting into profit margins. Even worse off may be other automakers, most of whom can't match Tesla's ability to produce EVs at scale and could see their tax credits evaporate in a few weeks too.