Tesla told employees that it expects to lose the full $7,500 federal tax credit on its cheapest electric car because the batteries come from China.

Since January, some electric automakers have been enjoying a surge in demand thanks to the new federal tax credit program for electric vehicles coming into place.

Tesla has been the biggest winner since its buyers completely lost access to the tax credit years ago after the automaker hit 200,000 deliveries in the US.

For the last three months, eligible buyers in the US could get a $7,500 tax credit on all Tesla Model 3 and Model Y vehicles, which are the automaker’s two cheapest and most popular models.

However, we knew that things would change by the end of March.

When the new tax credit program was announced, it included requirements for battery production in North America and battery material sourcing in countries with free trade agreements with the US in order to get access to up to half of $7,500 credit.

But the guidance on how these requirements would work was not released in time for the new tax credit coming into effect in January, and therefore, they were waived until the second quarter.

By then, the IRS has been expected to release detailed guidance about how those requirements will be accounted for.

Now Electrek has learned from sources familiar with the matter that Tesla has communicated to employees that it expects the IRS to release the guidance any day now, and the automaker expects to lose the full credit on the Model 3 Standard Range – its cheapest vehicle.

The Model 3 Standard Range is built in Fremont, California, in the US, but its battery pack is using LFP battery cells built in China.

The communication to employees appears to have been done to prepare buyers of those vehicles, as the access to the full credit could change if delivery is done on April 1 rather than March 31 – pending official guidance.

As for Tesla’s other Model Y and Model 3 vehicles in the US, they are expected to retain access to the full tax credit as they are using battery cells built by Tesla or Panasonic in Nevada, California, or Texas.

The battery material sourcing might be more of an issue, but Tesla appears confident that it won’t be the case as a large percentage of its battery materials are sourced from countries with free trade agreements like Australia and Canada.