Tesla reportedly informed its employees that its least expensive EV may lose eligibility for the newly revamped US federal EV tax credit soon. This is because the cheapest Model 3 features a different battery chemistry, and those batteries are sourced and manufactured in China.

With the arrival of the new year, a new US EV tax credit went into place. It was expected that nearly every EV in the US was unlikely to qualify for the new credit thanks to strict battery materials sourcing and manufacturing guidelines. The rules are meant to encourage automakers to build electric cars and their batteries in the US, with local materials, and it's working.

Not long after 2023 was upon us, the US Treasury announced that it hadn't yet finalized its guidance on the battery materials and manufacturing rules. Thus, nearly all EVs in the US qualify for the credit as part of a sort of "loophole." The new rules are expected to be officially put into place in April 2023.

Tesla reduced its prices significantly in 2023, not only to drive demand and create price competition, but also to ensure that more of its EVs would qualify for the new credit, at least temporarily. With the reduced prices, along with some tweaks the government has made to the credit language, Tesla has been able to take advantage of the credit.

That said, the US EV maker's cheapest car, the rear-wheel-drive Model 3 "Standard Range" is equipped with Lithium Iron Phosphate (LFP) battery cells, which Tesla sources from China. None of the automaker's other US EVs use the batteries, though it did note that they'll be used in the base models, so if there were a Model Y RWD Standard Range option on our shores, it would likely have the same batteries as the cheapest Model 3.

At any rate, according to Electrek, sources familiar with the story reportedly shared that Tesla believes the IRS will release the updated guidance in the coming days, which will make the Model 3 with the LFP batteries ineligible for the credit.

While the base Model 3 is built in the US just like all Tesla's other vehicles, it's the only current model with a battery pack produced in China. The automaker's other cars should continue to qualify for the credit since their batteries are produced domestically, though we'll have to wait for official battery materials guidelines from the US Treasury to know for sure since not all the materials are sourced locally.

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