Tesla faces tax credit puzzle – Automotive News
6 months ago Comments Off on Tesla faces tax credit puzzle – Automotive News
SAN FRANCISCO — Tesla Motors, facing a likely shortage of U.S. tax credits for the Model 3, its first mass-market electric vehicle, may consider a clever production strategy to squeeze more money out of the program for its buyers.
But that would add to the logistical challenges for a company that has struggled in the past to deliver products on time.
Tesla said last week that 325,000 people had placed refundable $1,000 deposits on the Model 3, a sedan starting at $35,000 with a range of 215 miles and up, in its first week of orders.
Because of a limit on the number of Tesla customers who can claim a $7,500 federal tax credit on electric-drive vehicles, it seemed some Model 3 buyers would come up empty-handed.
Yet eagle-eyed customers and analysts noticed a loophole in the IRS rules for the credit: The $7,500 credit for electric-drive vehicles isn’t cut until the end of the quarter after the one in which a company hits its limit of 200,000 cars delivered in the United States.
So, the reasoning goes, Tesla could intentionally hit its limit on the first day of a quarter, then deliver a wave of vehicles to American customers over the next six months before the credit begins to disappear.
Asked about this gambit on Twitter, Musk seemed to acknowledge it.
“We always try to maximize customer happiness even if that means a revenue shortfall in a quarter,” Musk replied in an April 3 post on Twitter.
When asked whether owners of Tesla’s Model S sedan and Model X crossover EVs, who go to the front of the reservation queue, would exhaust the remaining credits, Musk added: “Our production ramp plan should enable large numbers of [new customers] to receive the credit.”
$14 billion order backlog
But executing a sly tax strategy would add an extra layer of complexity to the already-tricky equation facing Tesla, which must weigh its desire to clear an estimated $14 billion backlog of orders against the risk of hastily delivering cars with quality glitches.
Managing deliveries to squeeze out more credits may be difficult to achieve while Tesla is ramping up to mass production, given the company’s long track record of struggling to meet its manufacturing timelines, said Jessica Caldwell, a senior analyst at Edmunds. She said Tesla must solve other pressing challenges to satisfy mass-market customers, such as bulking up its lease and finance options.
“It would be great to maximize credits as well as possible, but that takes some orchestration,” Caldwell said. “There are so many logistics challenges alone in the task of producing more than 300,000 vehicles for customers.”
All early producers of electric-drive cars, including General Motors with its Chevrolet Volt plug-in hybrid and Nissan with its Leaf EV, eventually will run out of credits under the U.S. program, created by an economic stimulus bill in 2008.
The plug-in vehicle tax credit, which has played a key role in enticing Americans to buy electric-drive vehicles, starts at $2,500 and maxes out at $7,500, depending on the size of the battery inside the car. Because of their large lithium ion battery packs, Tesla’s vehicles all qualify for the maximum $7,500 credit.
Once an automaker sells 200,000 vehicles in the United States, a phase-out begins. At the end of the fiscal quarter after the one in which the company hits the 200,000 mark, the IRS cuts the credit in half for the next two quarters to a maximum of $3,750. Then the IRS slashes the credit in half again for another two quarters — after which the credit drops to zero.
Analysts expect Tesla to cross the 200,000 threshold as soon as 2018, once deliveries of the Model 3 begin. These are merely estimates, though, because Tesla does not break out its sales reports by country. According to estimates by the website InsideEVs.com, Tesla has delivered 68,500 Model S sedans and 2,900 Model X crossovers in the U.S. since 2012.
Tesla, which has vowed to start delivering the Model 3 in late 2017, said it will inform Model 3 customers about the availability of tax credits when they buy their cars.
“We are committed to providing customers with up-to-date information about current incentives at the time of purchase,” Tesla spokeswoman Alexis Georgeson wrote in an email. “We’ll do the same when it’s time for customers to confirm their Model 3 orders.”
It is still possible that Congress could solve Tesla’s puzzle before the Model 3 arrives by re-upping the EV tax credit, as a National Academy of Sciences panel recommended in a 2015 report on the challenges for adoption of electric cars.
“Because the cap won’t be hit for a few years, there doesn’t seem any urgency yet to push for extension,” said Roland Hwang, transportation director at the Natural Resources Defense Council, who worked on the National Academy of Sciences report. “I’m optimistic that we can get these credits extended before Tesla and other manufacturers hit the cap.”
David Undercoffler contributed to this report.
You can reach Gabe Nelson at email@example.com.
Tesla faces tax credit puzzle – Automotive News