Tesla could maximize federal tax credits for its customers, but at what cost?

Some of Tesla’s customers could soon be victims of the company’s success. The $7,500 federal tax credit for EV purchases is designed to sunset when a particular automaker sells over 200,000 EVs, and Tesla is nearing that bittersweet milestone. Ironically, thousands of affluent buyers of Models S and X received the credit, while most future buyers of the mass-market Model 3 seem likely to miss out.

However, Tesla may have a trick or two up its sleeve 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.”

The math is complex, but spreadsheet whizzes predicted in 2016 that, if Tesla could time its Model 3 deliveries just right, it could extend the full $7,500 credit for almost six months after reaching the 200,000 mark.

Some more recent calculations come to us courtesy of Bloomberg’s Model 3 Production blog. Tom Randall writes, “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.

What a difference a day makes department: If Tesla can manage to deliver its 200,000th car on July 1, rather than on June 30, it will extend the subsidy calendar by three months. This would allow thousands more Model 3 buyers to claim the subsidy, potentially saving them as much $366 million in the aggregate.

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. However, 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 tremendous amount of goodwill, especially if some of the company’s less-wealthy fans, patiently waiting for a $35,000 base Model 3, could somehow get the full credit (though it’s hard to see how that would happen, as Tesla has said that the base model won’t be delivered until the end of the year). Who knows, people might start to think Elon Musk isn’t such a bad guy after all.

[Editor’s note: Changed the last paragraph to clarify that base Model 3 buyers are unlikely to see the full credit in any case.]

 

Source: Bloomberg Tesla Model 3 Tracker
Image: Steve Rainwater

  • Jeff Songster

    This is a smart plan. Holding back slightly for the larger number of cars getting the credit is worth alot. Q 3 will be massive by comparison in US.

    • nordlyst

      Evry quarter should be bigger, and some credit is available until 2020 if the 200k limit is crossed today (Q3 2018).

  • Joe_Isuzu

    When was this written? No one waiting for the 35K version of the car is going to get the full tax credit. Per Tesla, the base model is not being built until next year.

  • nordlyst

    Q3 is full credit regardless, the credit begins to phase out only the second quarter after the quarter in which 200k is passed. This weird design is to avoid uncertainty, at the time of purchase, about whether or not the buyer can get the credit. If the credit was reduced the quarter the limit is passed it would be retroactive. If reduced the quarter after, there would be uncertainty at the beginning of the quarter if the manufacturer was near the limit towards the end of the previous quarter.

    If Tesla passed 200k sold in the US in Q2, the full credit still applies for all of Q3. If they pass it today, or more likely tomorrow since today is Sunday, the full credit applies for the rest of 2018. Half the credit then applies for the first half of 2019, and a quarter credit for the second half.

    Given the ramp, it’s obvious that total credit is very much affected by whether the limit was rescued on Friday or is on Monday. Assuming an average production of 5,000 per week for the remainder of 2018 gives 130,000 cars in the second half, and for 2019 we can assume 75,000 for Q1, 90,000 for Q2, 110,000 for Q3 and 125,000 for Q4 – 400k inn total.

    This gives the following results:

    1) Passed 200k in June:
    200k credits (the limit)
    + 65k full credits (Q3)
    + 140k half credits (65k in Q4, 75k in Q1-19)
    + 200k quarter-credits (Q2+Q3 2019)
    = 200 + 65 + 70 + 50 = 385 credits
    towards 605k car purchases

    2) passes 200k early July:
    200k credits
    + 130k full credits (rest of 2018)
    + 165k half credits (H1 2019)
    + 235k quarter-ctedits
    = 200 + 130 + 82,5 + 58,75 = 471,25 credits
    towards 730k car purchases

    The value of the 90k credits difference is $7,5k * 90k = $675 million. Whoever got 330 million is assuming Tesla won’t manage to deliver as many cars as I’ve assumed here!

    The 125k additional customers to benefit from some tax credit might include a lot of base version customers, provided Tesla starts delivering this late 2018.

    Of course, whether Tesla can do this remains to be seen. If they claim to have passed 5,000 a week it ought to be absolute minimum to manage the same on average over H2. The further ramp I’ve speculated for 2019 is more, well, speculative.