Tax Credits for a Tesla Electric Vehicle: Maybe?

A lot of excitement has been generated around the announcement of the Tesla Model 3, the new affordable version of Tesla’s electric line of cars.  The car is set to retail for $35,000 but the availability of a $7,500 credit could push that effective cost down to $27,500.  The credit is obviously extremely valuable as it represents a 20% discount on the retail price.  Moreover, according to August 2014 data from TrueCar.com, the tax credit pushes the effective cost of the Model 3 below the average cost of a car today, which was $31,252.  The credit is obviously very valuable to a purchaser.

Section 30D of the Tax Code provides for a tax credit to the purchaser of a 4-wheel vehicle where the following is true:

(1)  the original use of which commences with the taxpayer (i.e. used cars won’t qualify),

(2) which is acquired for use or lease by the taxpayer and not for resale,

(3)  the vehicle must be used predominately in the United States,

(4)  which is made by a manufacturer,

(5) which is treated as a motor vehicle for purposes of title II of the Clean Air Act,

(6) which has a gross vehicle weight rating of less than 14,000 pounds, and

(7) which is propelled to a significant extent by an electric motor which draws electricity from a battery which (a) has a capacity of not less than 4 kilowatt hours, and (b) is capable of being recharged from an external source of electricity.

The Model 3 will satisfy all of the requirements of (3) – (7); therefore, to get the credits you need to ensure you are the original buyer, you are not acquiring the car for resale, and that you use the vehicle predominately in the United States.

The credit is equal to the sum of:

  • $2,500 and
  • for a vehicle which draws propulsion energy from a battery with at least 5 kilowatt hours of capacity, $417, plus an additional $417 for each kilowatt hour of battery capacity in excess of 5 kilowatt hours (not to exceed $5,000).

The Tesla Model 3 will reach the maximum allowable credit of $7,500.

That said, with respect to Tesla manufacturing, the credit may be phased out by the time you can purchase one.  The credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold for use in the United States (determined on a cumulative basis for sales after December 31, 2009).

The phase out period begins with the second quarter following the calendar quarter on which Tesla has sold 200,000 vehicles for use in the United States.  The phase out lasts for one year with a reduction of 50% of the credit for the first two quarters of the phase out period and a reduction of 75% for the next two quarters.

According to the linked article, USA Today:  End in sight for Tesla buyers to get federal tax credit, Tesla has already sold approximately 80,000 of the more expensive Model S and, when combined with the Model X, could reach 140,000 in total sales by the end of this year.  Therefore, they would be on track for hitting the 200,000 limit sometime in 2017.

If the limit is not hit by the time the first Model 3s become available, then many of the Model 3 buyers should be eligible for the credit.  For example, let’s assume Tesla hits the limit in the last calendar quarter of 2017.  This would mean that purchasers would get a full $7,500 credit until April 2018, and then a $3,750 credit until October 2018, and $1,875 credit until April 2019.

The ability to claim to the credit for the new Model 3 may depend on how quickly Tesla can manufacture and deliver their cars during the phase out period but it seems very likely that many, if not most, of the model 3 purchasers will not get any portion of the credit since it has already surpassed 325,000 orders in its first week.

Of course, Tesla could attempt to delay the phase-out period by holding back shipment of the cars that would cause them to trip this limit but that seems an unlikely approach from a customer satisfaction point-of-view.

Alternatively, you could “jump” the line by purchasing the more expensive Model S or Model X which can be delivered within a shorter time frame.  However, while the tax credit would be available to you, the cost of the base Model S and Model X is $71,200 and $80,000, respectively.

One thing that may be interesting to watch is if there is any further legislation extending this credit.

 

2 thoughts on “Tax Credits for a Tesla Electric Vehicle: Maybe?

  1. Interesting. Another form of jumping the line may be getting more options on the 3 than you were intending since more feature rich cars will get delivered first. If this gets you a credit while those in the back lose out the extra features could essentially pay for themselves (depending of course on cost of those features and timing for the phase out and order fulfillment).

    • I actually did not realize that feature rich cars would be delivered first. It may still be difficult to get the credit if the law remains unchanged, however, since Model S and Model X may get them a long way towards filling the quota. Moreover, I know their website indicates that the fill date will also depend on region with many saying that means California orders will fill the fastest since Tesla manufacturing is located in Fremont, CA.

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