Some US Tesla Model 3 customers will soon lose $US7,500 EV tax credit

The $US7,500 Inflation Reduction Act EV tax credit has so far been a raging success in driving sales of EVs in the United States. However, the base variant of the best selling EV in the world will not be eligible for the incentive from next month.

Electrek has reported that Tesla has told its employees that it expects to lose the full $US7,500 credit on the Model 3 Standard Range variant because the batteries for that variant aren’t made in the US.

The US EV tax credit is available on all electric vehicles under $US55,000 and is available for consumers with adjusted gross incomes of less than $US150,000.

Unlike the old credit, the new EV Tax credit isn’t capped at 200,000 vehicles per manufacturer meaning it applies to all vehicles. However there are also requirements on where the batteries in the vehicles are produced.

Sourcing and manufacturing requirements for EV tax credit

The Bipartisan Policy Center says the IRA includes three sets of requirements related to vehicle components and assembly for EV models to qualify for tax credits, with the intention of bolstering domestic production.

Firstly, the final assembly of the electric vehicle must occur in North America to be eligible. This part was effective immediately after the legislation was enacted on August 16 2022.

The second requirement is related to critical minerals and battery components and has two standards. In order to qualify for the full $US7,500 credit the vehicle must meet both standards. If the vehicle only meets one of the standards it qualifies for a $3,750 credit:

1. 50% of the value of battery components must be produced or manufactured in North America in fiscal year 2023, with the minimum percentage increasing annually.
2. 40% of the value of critical minerals used for the vehicle must be extracted, processed, and/or recycled domestically or in a country the U.S. has a free trade agreement with, with the minimum percentage increasing annually. EV manufacturing requires a range of minerals, including cobalt, copper, nickel, graphite, and lithium.

Although manufactured and assembled in the Fremont factory in California, The Model 3 Standard range for US customers uses lithium iron phosphate (LFP) battery cells which are imported from China.

During the its Q3 earnings call in October last year Tesla’s senior vice president of powertrain and energy engineering, Drew Baglino indicated that although they are currently importing the LFP battery packs from China, Tesla is working to localised battery production in North America.

“Our goal is to localise all key parts of the vehicles at least on the continent, if not closer to where the vehicles are produced. So, that is our goal and we’re working internally and with our suppliers to accomplish and not just at the end-assembly level but as far upstream as possible.”

Once they achieve this the Model 3 Standard Range will be eligible for the tax credits again provided that it also meets the 40% critical mineral sourcing requirement as well.

Restrictions on tax credits for imported batteries waived for first quarter

Because the guidance on how these standards work wasn’t released by the US government in time for the EV tax credit (which came into effect in January) the government waived the requirements until the second quarter which begins on April 1st.

Inflation Reduction Act pulling battery supply chain to the US

Along with the Advanced Manufacturing Credits, the domestic production requirements of EV tax credit are certainly achieving their stated goal of bringing clean technology manufacturing to the US.

In February an Australian company announced that it had secured a deal with Tesla to supply refined battery materials to Tesla and that it was setting up a processing plant in the US.

Tesla also recently announced that it is moving its Berlin based battery manufacturing to the US to take advantage of the IRA incentives.

Aside from the consumer side EV tax credits, the $US35 per kWh Advanced Manufacturing Credits are a huge incentive to set up operations in the US.

On a Tesla Model 3 Standard Range with a 60 kWh battery pack, the manufacturing credits work out to $US2,100 per vehicle for the manufacturer.

For US customers Tesla’s other Model Y and Model 3 variants will still retain the full $US7,500 tax credit as the cells in those vehicles are all built in the US.