Juggling Act: Tesla Will Have to Deal With a Tax Credit Gap

Much to the delight of EV fanatics and sandal enthusiasts around the world, Tesla reported last week that 325,000 people had placed refundable $1,000 deposits on its Model 3 sedan. Even pessimistically projecting a defection rate of 25 percent, that’s still nearly a quarter of a million cars which need to be built and delivered starting late next year.

Industry analysts have nattered at length about the logistics of the mass order and Tesla’s ability to pull it off. However, there is a new obstacle on the horizon, this time involving the core reason many have given for reserving a Model 3: tax credits.

Electric vehicle credits and their limitations vary by country. In America, arguably Tesla’s biggest market for the Model 3, the Feds put a yearly limit on the number of $7,500 tax credits able to be claimed by single manufacturer. Currently, that limit stands at 200,000 credits.

Sharp eyed readers and mathematicians alike will note this figure is far less than the number of Model 3 sedans reserved to date and much less than Tesla’s goal of eventually building half a million vehicles per year. It seems then some customers may come up empty handed. Losing a $7,500 incentive would sting even for purchasers of a $100,000+ Model X; at the Model 3’s price point, it may prove ruinous. After all, $7,500 is a very attractive carrot on a $35,000 car.

The problem is compounded when one considers the $30,000 (after credit) Chevrolet Bolt, which heads to showrooms this fall. Expected to sell at a slower pace (simply because it’s not a Tesla), a sizable price gap could open up between the Bolt and Model 3 after Tesla runs out of credits.

The upshot to all this? The IRS in America doesn’t close the $7,500 credit for electric-drive vehicles until the end of the quarter after the one in which a company hits the 200,000 vehicle delivery mark in the U.S.

Put plainly, Tesla could plan to hit its credit limit on Day 1 of a particular quarter, delivering vehicles over the next two quarters until the credits are used up like napkins at a Waffle House.

It’s like a high stakes game of musical chairs using someone else’s money. Cynics in the audience might speculate that Tesla could simply say “damn the torpedoes,” manufacture and deliver as many Model 3 sedans as possible, and let customers figure out the tax credits on their own. Once all the tax credits are gone: tough luck, Mister.

The thing is though, Musk himself seems to have acknowledged this strategy during an April 3 Twitter AMA, saying, “We always try to maximize customer happiness even if that means a revenue shortfall in a quarter.” This seems to indicate Tesla is aware and planning for a credit shortage.

This is not to say Elon & Co. are intentionally gaming the system, but it does beg the question: will some customers be left standing with a $7,500 surprise when the music stops?

[Image: Tesla Motors]