Tesla’s Most Affordable Vehicle to Lose Half of its Tax Credit in 2023

Tesla’s lowest-priced vehicle, the rear-wheel drive Model 3, won’t be eligible for the full $7,500 federal tax credit as of next year.

Tesla started warning buyers (and window shoppers) on Monday that the Inflation Reduction Act credit for its cheapest Model 3, as well as the long range variant, will drop to $3,750 for deliveries on or after January 1. The change means that Tesla believes its battery materials in the electric vehicle won’t meet the IRA’s 2024 sourcing rules.

The automaker is advertising the credit reduction in a banner at the top of its website, presumably in an attempt to juice year-end sales.

The warning comes just days after the Treasury Department shared an update on IRA credit rules involving “foreign entity of concern (FEOC) requirements.” The Treasury said on its blog that starting next year “an eligible clean vehicle may not contain any battery components that are manufactured or assembled by a FEOC.” The Energy Department says China, Russia, North Korea and Iran are FEOCs.

The eligibility change means Tesla’s cheapest vehicle will be $35,240 in the U.S. after the credit, for folks who meet IRA income rules (up from $31,490).

Other Tesla vehicles may see credit reductions, too. On the Model Y and X order pages, Tesla warns that “reductions” to the IRA credit are “likely after Dec 31.”

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