Will federal tax credits still be around by the time you get your Model 3?

Tesla Model 3

(Updated 4/5/16 11:00am EST to include link to IRS code and information suggesting how Tesla could maximize available tax credits.)

Tesla’s mission has always been to bring EVs to the mass market, and the culmination of the company’s grand strategy is the Model 3, unveiled last week at a price of $35,000. Auto market analysts tell us that about a third of US car buyers buy cars at or above this price point, so the potential market for Tesla’s new EV is huge.

If you are able to take advantage of the federal tax credit for EV purchases, the final cost for your 3 might be as low as $27,500 (kudos to Tesla for not disingenuously quoting the price after the tax credit, as some automakers do). But don’t count your little green chickens just yet.

The EV tax incentive was designed to give a boost to early adopters of a new product, and as such it is designed to “sunset” once a particular automaker reaches 200,000 in EV sales.

By most estimates, Tesla has already sold around 50,000 vehicles in the US, and it plans to sell about that number again by the end of 2016. If it keeps ramping up production of Models S and X as planned, it could be very close to the 200,000 mark by the end of 2017, when deliveries of Model 3 are scheduled to begin.

Tesla Model 3

According to Internal Revenue Code 30D, when the 200,000-unit threshold is reached, the tax credit will automatically 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, over the following 12 months, the credit will drop to $3,750 for six months, then to $1,875 for another six months, and then…gone!

Tesla has already logged over 200,000 orders for Model 3. Even if only half of those translate into deliveries, many of those buyers are not going to get the whole cookie. There’s no way to know if you’ll skate in before the cutoff point, because Tesla will probably be producing the Model 3 in batches – all of one trim level first, then the next, and so on.

It will be ironic if all the tax credits get soaked up by the affluent buyers of the Roadster, S and X, leaving none for the theoretically more deserving middle-classers waiting patiently for the 3. “One could argue [that Tesla] sort of wasted their credits on the very wealthy, people who didn’t need it,” Kelley Blue Book’s Rebecca Lindland told Wired.

The Tesla team is well aware of the issue. “Our production ramp plan should enable large numbers of non X/S customers to receive the credit,” tweeted Elon Musk. How that would work is not clear, but Musk assured us that “we always try to maximize customer happiness even if that means a revenue shortfall in a quarter.”



Forbes suggests that if the timing of Model 3 deliveries is scheduled just right, Tesla could extend the full $7,500 credit for almost six months after reaching the 200,000 mark, becuase the tax code then switches from counting cars delivered to counting calendar quarters. However, this assumes that the production schedule for Model 3 is on time, otherwise the tax credit could expire in mid-2018 through the deliveries of Model S and X.

In any case, the fate of the EV tax credit may depend on the outcome of November’s US election. A Republican-dominated government could conceivably ax the credit as soon as possible, whereas a Democrat-controlled Congress might vote to extend it.


SEE ALSO: Tesla kills the instrument cluster


Sources: Wired, Electrek, @elonmuskForbes

  • Lito Tongson

    it’s still a great car for $35K

  • Wade

    I wonder how many of the deposits are from individuals who are not in the U.S.?

  • Lance Pickup

    ‘The Tesla team is well aware of the issue. “Our production ramp plan should enable large numbers of non X/S customers to receive the credit,” tweeted Elon Musk. How that would work is not clear, but Musk assured us that “we always try to maximize customer happiness even if that means a revenue shortfall in a quarter.”’

    The way it could work is that Tesla could pre-build, but not deliver, a large batch of vehicles starting with #200,000, and then deliver the batch on the first day of a new quarter. Not only would this cause the revenue shortfall in the prior quarter, but it would probably also anger those customers who are seeing their deliveries being delayed for this reason. But, it is for the greater good.

    Even without going to that drastic a scenario, I’m sure that at a minimum Tesla will deliver certain cars overseas rather than in the US so that car #200,000 in the US is delivered the first day of a new quarter.

  • Ryan

    200k US sales. Not total sales.

  • nordlyst

    The critical issue here is when Model 3 can be delivered and the production ramp up. We don’t know how many of the reservations are in the US or how many convert into a sale. Or how late in 2017 Tesla plans to start delivering.

    I agree that it seems unlikely that ALL of the reservation holders will get the full credit, unless it is prolonged (unlikely and frankly pointless since the demand is there without it). But plausible best case scenarios in which MOST who have reserved SO FAR get the full credit do exist. Say Tesla begins delivery in September 2017 and have sold 170,000 cars in the US by then. They could deliver 20,000 Model 3 (and nearly 10,000 S/X) in that quarter. But if they can manufacture 30,000 M3 in the first quarter of production they would then be able to deliver 10,000 more than the second quarter production in that quarter, perhaps 50,000 or even more. Then the third quarter of Model 3 production would be the last with full credits, say 75,000 more. This is a best case scenario after all! And nearly 150,000 Model 3 with full credit. For 2019 we’d then have half the credit in the first half and a quarter in the second, with 350,000 cars a pretty reasonable goal considering that half a million in 2020 is what were aiming for.

    Of course if Model 3 is delayed everything becomes more complicated. If it were to be so much delayed that delivery hasn’t begun when the clock starts ticking – when car no 200,000 I’d delivered – then not many will get the full incentives.

    But really, it’s far too soon to say now that only a few will get it, unless you know Model 3 won’t ship on time. I am aware Tesla hasn’t exactly got a stellar record to show, but to my mind it’s not certain things cannot be different this time.