Photo: Tesla
The Inflation Reduction Act (IRA) was a boon for EV makers, with a $7,500 tax credit making their cars more affordable for qualifying buyers. However, the situation will change significantly in 2024, and not even Tesla will be able to enroll all its models into the program. The IRS guidance received by Tesla indicates that the Model 3 RWD and Model 3 LR will lose the entire $7,500 tax credit.
The Inflation Reduction Act (IRA) poured billions into the automotive market, trying to advance electro-mobility and local battery production in the US. Everybody cheered when the IRA was launched, from battery manufacturers and carmakers to car buyers who also get to benefit from a hefty tax credit. However, the IRA tax credit set more draconic conditions from one year to another, which means that some electric vehicles that benefitted from the tax credit in 2023 might not qualify in 2024.
The IRA tax credit will change significantly from January 1, 2024, when the benefit will apply at the point of sale. This means buyers will not have to wait until next year when they file taxes to get the credit. It will be applied upfront to the price of the car, provided the IRA conditions are met. This is good for consumers and car manufacturers alike because more people will be able to afford an electric vehicle. However, more restrictions entering into effect from January 1, 2024, mean that many EV models would not qualify for a tax credit.
The rules of origin, which entered into effect this year, will be stricter in 2024. More specifically, the percentage of minerals that need to be extracted and processed in the US or a country with which the US has a free trade agreement increases from 40% to 50%. It will also increase by 10 percentage points every year until 2027 when it reaches 80%. Similarly, the percentage of battery components manufactured in the US must exceed 60% instead of 50% until now.
The idea was to incentivize more production and mining in North America. Unfortunately, things moved slower than initially planned, which means that fewer EV models will qualify for the full $7,500 tax credit or at all. Even Tesla, with its highly localized and vertically integrated supply chain, will suffer in 2024. The EV market leader warned its customers for the past three months that they should make a purchase by the end of the year or they will not be able to access the full tax credit.
As the IRS updated its guidance, Tesla announced on its website that the Model 3 RWD and the Model 3 Long Range would not get the $7,500 tax credit anymore after December 31. Tesla initially considered that the credit would halve for these models, but now it's clear that no tax credit will be awarded to those purchasing them. The reason they lose these incentives is the Chinese-made battery cells.
The Model 3 RWD uses lithium-iron-phosphate (LFP) cells supplied by CATL, while the Long Range variant is made with LG cells imported from China. All other models produced at the Tesla Fremont factory use Panasonic cells. These include the Model 3 Performance, all versions of the Model Y, and the Model S/X, the latter using Panasonic cells imported from Japan. The Giga Texas production also uses cells manufactured in Nevada or Texas. However, many of those models might lose half of the tax credit after December 31.
While unfortunate, this change might not have such a drastic effect on the market. Most carmakers will promote leasing more aggressively, considering that rules of origin don't apply to leased vehicles. Carmakers that didn't qualify for a tax credit in 2023 were already using this loophole. Now, it will only become more popular.
The IRA tax credit will change significantly from January 1, 2024, when the benefit will apply at the point of sale. This means buyers will not have to wait until next year when they file taxes to get the credit. It will be applied upfront to the price of the car, provided the IRA conditions are met. This is good for consumers and car manufacturers alike because more people will be able to afford an electric vehicle. However, more restrictions entering into effect from January 1, 2024, mean that many EV models would not qualify for a tax credit.
The rules of origin, which entered into effect this year, will be stricter in 2024. More specifically, the percentage of minerals that need to be extracted and processed in the US or a country with which the US has a free trade agreement increases from 40% to 50%. It will also increase by 10 percentage points every year until 2027 when it reaches 80%. Similarly, the percentage of battery components manufactured in the US must exceed 60% instead of 50% until now.
The idea was to incentivize more production and mining in North America. Unfortunately, things moved slower than initially planned, which means that fewer EV models will qualify for the full $7,500 tax credit or at all. Even Tesla, with its highly localized and vertically integrated supply chain, will suffer in 2024. The EV market leader warned its customers for the past three months that they should make a purchase by the end of the year or they will not be able to access the full tax credit.
As the IRS updated its guidance, Tesla announced on its website that the Model 3 RWD and the Model 3 Long Range would not get the $7,500 tax credit anymore after December 31. Tesla initially considered that the credit would halve for these models, but now it's clear that no tax credit will be awarded to those purchasing them. The reason they lose these incentives is the Chinese-made battery cells.
The Model 3 RWD uses lithium-iron-phosphate (LFP) cells supplied by CATL, while the Long Range variant is made with LG cells imported from China. All other models produced at the Tesla Fremont factory use Panasonic cells. These include the Model 3 Performance, all versions of the Model Y, and the Model S/X, the latter using Panasonic cells imported from Japan. The Giga Texas production also uses cells manufactured in Nevada or Texas. However, many of those models might lose half of the tax credit after December 31.
While unfortunate, this change might not have such a drastic effect on the market. Most carmakers will promote leasing more aggressively, considering that rules of origin don't apply to leased vehicles. Carmakers that didn't qualify for a tax credit in 2023 were already using this loophole. Now, it will only become more popular.
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