Will Tesla sacrifice profit to preserve tax credits for its customers?

Posted on July 06, 2018 by Charles Morris

Has Tesla passed the 200,000-vehicle milestone, or hasn’t it? That’s the $3,750 question Model 3 reservation holders are asking.

Above: Tesla Model 3 fleet ready for delivery to customers in Toronto (Image: X Auto via Model 3 Owners Club)

The $7,500 federal tax credit for EV purchases was designed to sunset when a particular automaker sells over 200,000 EVs, and it seems certain that Tesla recently passed that bittersweet milestone. The question is whether the company will be able to finagle the figures to allow the maximum possible number of buyers to claim the credit.

Tesla may not give a definitive answer until it announces Q2 earnings, but speculation is running rampant. The company has said it will try to preserve the full credit for as many Model 3 buyers as possible, and Bloomberg seems to think it has found a way to do so. InsideEVs, on the other hand, thinks the 200k milestone has come and gone. There’s a lively discussion of the issue on the Tesla Motors Forum.

According to Internal Revenue Code 30D, when the 200,000-unit threshold is reached, the tax credit will be phased out “beginning with the second calendar quarter after the calendar quarter in which at least 200,000 qualifying vehicles manufactured by that manufacturer have been sold.” Then the credit will drop to $3,750 for six months, then to $1,875 for another six months, and then…gone!

Above: A look at the phase-out schedule for automaker eligibility of the U.S. federal tax credit for electric vehicles (Image: CleanTechnica via EV Adoption)

In the past, Tesla has promised to milk the maximum amount of benefit for its customers. In 2016, Elon Musk tweeted, “Our production ramp plan should enable large numbers of non X/S customers to receive the credit,” and assured us that “we always try to maximize customer happiness even if that means a revenue shortfall in a quarter.”

Assuming that we’re parsing the IRS-speak correctly, if Tesla delayed delivery of its 200,000th vehicle until July 1, buyers could continue to claim the full credit for another six months. Did it succeed in doing so? As Tom Randall wrote in Bloomberg’s Model 3 Production blog, “It’s pretty clear that Tesla is likely suppressing US sales as the quarter ends so as to extend its federal electric-vehicle subsidy.” He notes a marked shift in Model 3 deliveries from the US to Canada, and speculates that Tesla may also be accelerating overseas deliveries for Models S and X, as well as stockpiling cars at holding facilities.

Extending the subsidy calendar by three months would allow thousands more Model 3 buyers to claim the subsidy, potentially saving them as much $366 million in the aggregate.

Above: At Tesla's Fremont factory outbound logistics lot, a look at Model 3s getting ready for deliveries to customers (Youtube: Tesla)

However, as Musk noted back in 2016, this would amount to putting customers’ interests ahead of profits - a novel concept in the business world. Stockpiling cars and delaying deliveries would increase costs for the second quarter and push revenue into the third quarter, playing Hell with Tesla’s balance sheet, at least temporarily. When Tesla reports second-quarter earnings, the numbers could be even uglier than usual.

Nevertheless, the revenue would still arrive in the third quarter, so Tesla’s goal of becoming profitable in the second half wouldn’t be compromised. And such a move would generate a lot of goodwill, especially if some of those waiting for a $35,000 base Model 3 were able to get the full credit. However, few if any of those deserving souls are likely to get the full credit, as Tesla has said that the base model won’t be delivered until the end of the year. Yes. It’s complicated.

Meanwhile, US Representative Peter Welch (D-VT) has introduced a bill to extend the federal tax credit for another ten years. While this seems extremely unlikely to happen in the current political climate, there’s actually a pro-business argument for it. One result of the poorly-thought-out sunset clause is that automakers who sat on the fence and waited to produce EVs will gain a competitive advantage over automakers who were first movers, and foreign automakers will have an advantage over American automakers Tesla and GM.

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Written by: Charles Morris; This article originally appeared in Charged.


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