Batteries from Chinese-made Tesla Model 3 Standard Range Version Lose Tax Break

On March 23rd, Tesla revealed to employees that it is expected to lose the entire $7500 of federal tax break because its cheapest electric vehicle uses Chinese batteries, Electrek reported.

The US administration announced in August 2022 that from January 1, 2023, the US administration would provide a tax credit of up to $7500 per newly sold electric vehicle, but the condition is that the battery parts of the vehicle must be manufactured or assembled in North America. The battery must also contain key minerals mined, processed or recovered in the US or countries with free trade agreements with the US. The final assembly of the vehicle must also be carried out in North America.

But official guidelines on how the requirements would work were not released when the new tax breaks came into effect in January and were delayed until the second quarter. At that time, the US’s Internal Revenue Service (IRS) is expected to issue detailed guidelines on how the requirements are being accounted for.

Since January this year, due to the implementation of the new federal tax incentives for electric vehicles, the demand of some electric vehicle manufacturers has surged. Tesla is the biggest winner, because after the carmaker delivered 200,000 vehicles in the US, its buyers completely lost the opportunity to get tax benefits several years ago.

In the past three months, eligible buyers who bought Tesla Model 3 and Model Y models in the US (which are the cheapest and most popular models of the automaker) could receive a tax break of $7500.

However, the situation will change at the end of March when the new tax incentive plan will be announced, which includes the requirements of producing batteries in North America and purchasing battery materials in countries with free trade agreements with the US.

According to people familiar with the matter, Tesla has communicated to employees that it expects the IRS to issue guidelines in the near future, and the company expects to lose the full tax credit of its lowest priced model, the Model 3 standard range versions.

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The Model 3 standard range version is built in Fremont, California, USA, but its battery pack uses LFP cells made in China.

As for Tesla’s other Model Y and Model 3 in the US, it is still expected to qualify for the full tax credit because they use battery cells made by Tesla or Panasonic in Nevada, California or Texas.

Battery material procurement has been problem, but Tesla seems confident it won’t continue to be, since most of its battery materials come from countries with free trade agreements with the US, particularly Australia and Canada.