Teslanomics Explores When $7,500 Tax Credit Will Vanish For Tesla Model 3 Buyers

Tesla Model 3

MAY 28 2017 BY STEVEN LOVEDAY 29

When will the federal EV tax credit expire, and how will it affect the Tesla Model 3?

The U.S. federal government offers a tax credit for those that purchase an EV. The credit ranges from $2,500 to $7,500 depending on battery size. Essentially, all battery-electric vehicles qualify for the full incentive, because all-electric vehicles have batteries of 16 kWh or greater. Some plug-in hybrids also qualify for the maximum amount, like the Chevrolet Volt and the Chrysler Pacifica Hybrid.

You don’t get the money as a discount at the time of purchase, but rather, it comes back to you at tax time (as long as you actually owe more than that to the feds). You can take instant advantage of the incentive by leasing, because the money gets credited to the dealer, but dealers don’t award full value to the lessee. Once an automaker has sold 200,000 qualifying vehicles, the rebate begins to go away. Specifically, it enters into a phase-out period, which extends a number of months, and diminishes over time. Ben will tell you all about the details in the video.

General Motors will also see expiration earlier than most other automakers, due to Chevy Volt and Chevy Bolt sales. (Image Credit: Steve Fecht for Chevrolet)

The question is, when will Tesla hit the phase out, and when will the rebate hit zero? Keep in mind, there is no limit to the amount of qualifying vehicles an automaker can sell from the time it hits phase out, until the time it hits zero.

So, in a perfect world, the automaker doesn’t hit the mark too rapidly, until production is capable of peak speeds. Then, once the mark is hit, the automaker would be wise to dish out as many vehicles as possible, as soon as possible. This would give more consumers the potential to receive the full credit, or at least a fair portion of it.

Ben looks at how many vehicles Tesla has sold thus far, how many it intends to make/sell in the future, and when the company should bottom out. He is looking at around April of 2019 as his data-driven estimate, with Tesla hitting 200k in October of 2017; although for our money, we think it is still more likely to see this number hit early in 2018 (Tesla’s “in production” estimated numbers for the Model 3 for a certain month – starting in July, are not anywhere near the same as “delivered” in our minds). But, take a look at how he lays it out, and his reasoning behind the results, and come to your own conclusions.

Remember that the incentive could go away immediately for all manufacturers, if the current administration so chooses. Also understand that just because it expires for Tesla, has nothing to do with it expiring for competing manufacturers. Automakers just bringing competition to market a few years down the road, will enjoy the full credit for quite some time (as long as there is still a credit).

If the federal incentive expires prior to taking delivery of your Tesla Model 3, will you opt out? If you realize that the incentive may expire for Tesla, and you haven’t yet taken delivery, will this be enough to cancel your reservation and choose another EV? We wonder how many people will actually pick a different vehicle, or simply wait it out, if the rebate goes away.

Video Description via Teslanomics by Ben Sullins on YouTube:

From making a positive impact on the environment to skipping trips the gas station, electric vehicle ownership offers many benefits. Beyond the obvious benefits, another to consider is tax breaks. However, when it comes to taking advantage of these tax credits from Uncle Sam, the requirements to do so can be confusing. In this episode, I make it a little easier. I review how the tax credits work and some things to keep in mind when purchasing a Tesla or any other electric vehicle.

First and foremost, it’s important to understand that the tax breaks for purchasing an EV are tax credits, not discounts towards the purchase of your vehicle. It’s also important to understand how your income impacts your tax credit. Lastly, the number of units sold by vehicle manufacturers also play a role in electric vehicle owners’ tax credit eligibility amounts. Please note, these federal tax credits are available to US Tesla owners only.

Now, let’s talk dollar amounts. According to IRS.gov, “The total amount of the credit allowed for a vehicle is limited to $7,500.”and, in the US, “the credit begins to phase out for a manufacturer’s vehicles when at least 200,000 qualifying vehicles have been sold.” And, every two quarters, after the phase out begins, that $7500 is reduced by 50%. Also, super important to note, the credit does not take effect until you take ownership of the vehicle. So, when you reserve and bring your Tesla home will likely impact your tax break.

Considering all the above, if Tesla hits 200k units sold in October 2017, the credit will be $7500, and that will last through January 2018. From Q2 – Q3 of 2018, the credit will drop to $3,750. In October 2018 – March of 2019, the credit reduces to $1,875. Based on these projections and considerations, come April 2019, there will be no available tax credit for purchasing a Tesla or any other electric vehicle.

While I’m obviously a Tesla advocate, there are other electric vehicles that are worth considering – these include the Chevy Bolt as well as the next generations of the Nissan Leaf and the BMW i5. In 2018, there will also be a flood of new options, including higher end EVs from Jaguar and Volkswagen.

Whatever electric vehicle option you choose, you’ll not only be saving with tax credits but by helping the planet and saving at the pump. And, when considering which electric vehicle to go with, be sure you have all the facts. I offer various Tesla data and findings on Tesla ownership costs, product information and more.

Source: Teslanomics via Teslarati

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29 Comments on "Teslanomics Explores When $7,500 Tax Credit Will Vanish For Tesla Model 3 Buyers"

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Nix

All of this math would likely be invalidated by the current tax reform legislation which is currently being crafted in the Congress.

JohnMB

Seems like all these guys have the heads in sand..( tho jeep it clean)… or they just don’t read the not-so-fake news…this administration is more interested in building walls and military..screw the EV, the environment, and let’s just “make America dirty again”.

JohnMB

Seems like all these guys have the heads in sand..( just to keep it clean)… or they just don’t read the not-so-fake news…this administration is more interested in building walls and military..screw the EV, the environment, and let’s just “make America dirty again”.

Rightofthepeople

I’m curious Nix, have you seen an actual report that suggests the Trump tax reform legislation will include a repeal or reduction of the federal EV tax credit? I have not, but I freely admit I have only followed that story around the edges since it will take quite some time to develop into what may eventually pass.

My point to you is to suggest that you refrain posting conjecture as if it is fact based on your personal beliefs (for my part, I’m assuming you don’t like Trump or anyone with an R next to his name). Now, if there is some actual fact-based reporting that suggests the Trump budget will repeal the EV tax credit, I will gladly eat crow.

Nix

They are definitely on the cutting block. Not as part of the budget process, but as part of Trump’s tax reforms they are currently crafting.

The basic idea of the tax reform is to get rid of deductions in exchange for lower tax rates and higher standard deductions. The entire tax reform plan is based upon gutting the current tax code, with only charitable giving and mortgage interest are safe. Everything else is subject to the cutting table.

“With this huge reduction in rates, many
of the current exemptions and deductions will become unnecessary or redundant …. Charitable giving and mortgage interest deductions will remain unchanged for all taxpayers.”

https://assets.donaldjtrump.com/trump-tax-reform.pdf

I you think the current R’s in Congress would exempt the EV tax credit from this reform, I have a bridge to sell you.

If you are confused about their plan, why not call your Republican lawmakers and demand they be transparent with their legislation, publish the details of their tax plan, and open discussion of their actual bill up to public hearings? Instead of trying to jam it through as quietly as possible?

Nix

If you are confused about the intent on the Trump administration, here is the leaked memo from Thomas Pyle, Trump’s head of the Department of Energy Transition Team:

http://www.documentcloud.org/documents/3232186-Pyle-What-to-Expect-From-the-Trump-Administration.html

The parts that most affect us are

1) The priority to kill subsidies (that would include the $7500 tax incentive)

2) lower CAFE requirements (car makers will need to sell EV’s to meet these requirements in the future, the higher CAFE numbers cannot be achieved with ICE vehicles alone.)

3) Work to undo the Massachusetts vs. EPA ruling. This is not only the underpinning behind CAFE requirements, but was also used to force the EPA to approve California’s CARB ZEV program that the Bush administration initially rejected.

Massachusetts vs. EPA was a ruling based upon Statutory basis, not on constitutional basis. Simply amending the underlying statutes would instantly invalidate that ruling. There are many paths from there that Congress and POTUS could take to end CARB authority at many different levels.

Mitch

Thanks for the video. I think its a useful tool for deciding the next EV I get. I’m wondering have you looked at other companies to see if they would trigger the end of the credits?

Gary

The article is incorrect when it states the tax credit goes to the dealer when leasing. The leasing company gets the credit. Many manufacturers have a financing division (GM Financial, i.e.) so stating that the manufacturer gets the credit would sometimes be correct (but still misleading).

The only time a dealer would receive the tax credit is if they handled their own leasing (very, very unlikely). Only if you make your lease payments directly to the dealer would they have any possibility of getting the tax credit.

If one leasing company is not passing on the tax credit in full (or in the manner you would like), shop for another leasing company.

Ziv

Gary is exactly right. If your car dealer is not passing the tax credit directly to you on the lease papers, move on to another dealer. I originally leased my Volt from Criswell in Maryland and they were very clear on the fact that they were passing it to me. Good guys, they know their Volts.

Ziv

I read this and thought that it was incorrect. Could someone fill me in on the correct info?
” Considering all the above, if Tesla hits 200k units sold in October 2017, the credit will be $7500, and that will last through January 2018. ”

I thought that the tax credit for each car company was cut in half at the end of the SECOND quarter following the sale of the 200,000th electric vehicle. So if Tesla sold the 200k’th car in October of 2018, they would get the full credit for an UNLIMITED amount of electric cars until the end of March 2019. Then an unlimited number of their cars would get the half credit until the end of September 2019. I doubt Tesla will get to 200k this year.

https://www.fueleconomy.gov/feg/taxevb.shtml

Ziv

Here is a link to Jays article from early 2016. I think he is more accurate then than the current article is now. He thought last year that Tesla would hit 200k in July of 2018. That is still a pretty good guess/estimate.
I don’t mean to pit writer against writer but the earlier article is really good. It dives into the Federal language which is really important.

http://insideevs.com/when-will-the-7500-us-credit-expire-for-the-tesla-model-3-and-everyone-else/

Ben’s ditty should read though March of 2017, ir they hit 200k in October 2017.

Sidenote: Our recent fed expiry article (see below – we generally do 1 per year) pegs Tesla at 200k in early April – so one quarter earlier than originally expected by us in 2016. In this way, Tesla gets the full $7,500 credit from April 1st to September 31st, 2018…to best fully maximize peak production (assuming one believes that it will be allowed to run its course).

US Federal $7,500 Electric Vehicle Credit Expiry Date By Automaker
http://insideevs.com/us-federal-7500-ev-credit-expiry-date-by-automaker-estimates/

Rich

Ziv,
Right, the statement is incorrect. Once 200K is hit, the limit transfers to unlimited sales / time based limit. The unlimited full tax credit will run through the remainder of the quarter we’re in and then run 1 more full quarter. In his example of hitting 200K in Oct. 2017, the full tax credit would go in unlimited sales through Mar. 31 2018.

Ziv

Thanks, Rich. I thought that was the case but I hate to mention it because writing these articles is tough enough without backseat drivers like me spouting off.
But I think the timing is important, and making it less confusing is too.
I think Jay made a very good prediction last April when he thought 200k’th Tesla would sell some time in July/August of next year. I think it may actually happen a couple months earlier than that, but on the other hand Tesla could just concentrate a good portion of their production early next year on overseas sales and milk the credit for an extra quarter. Selling too many cars is a good problem to have!

TwoVolts

This statement is ambiguous and confusing, and open to misinterpretation: “You don’t get the money as a discount at the time of purchase, but rather, it comes back to you at tax time (as long as you actually owe more than that to the feds).”

The tax credit is not related to the ‘amount you owe’ (the term used on the 1040 tax form). Instead, the credit is limited by your ‘total tax’ amount. Example: Your tax is $20,000. You withheld (i.e., already paid) $12,000 throughout the year. You claim the $7500 tax credit. You still owe the feds $500 – which is obviously not more than $7500. You would still get the full $7500 tax credit.

@TwoVolts.

Correct. To take your example one step further.

As in your example you tax liability is $20,000 for the year. However say you paid $20,000 already in withholdings prior to filing your taxes. The feds send you a check for $7,500.

The credit reduces your tax liability by $7,500. If your tax liability is less than $7,500 for the year then you don’t pay taxes that year but the feds will only refund you what you have paid in withholdings, not the full $7,500.

Roy_H

There is no way Tesla is going to hit 200k sales in the USA by October this year. They stated that they will start production in July and [b]slowly[/b] ramp production up to hit 5000/week at the end of the year. And remember not all of these will go to US customers. Much more reasonable is they will hit the 200k mark January 2018. At 5k per week they will produce another 125k cars, most of which will qualify for the full $7500 credit.

He is making the assumption that Tesla will start producing Model 3s at 5k/week starting in July.

Roy_H

how do you do bold on this website.

Roy_H

Ah, angle brackets instead of square [ ]

And for an Ontario, Canada, slant on this thought, the Goal was for ‘1 in 20 by 2020’, or 5% of Vehicles would be EV’s. I understand it to be 5% of the Vehicles Sold to Owners, but 5% of the Total Vehicles Registered in Ontario would be more, although such a Goal might be even more optimistic! However, I understand we are still at just about 1% of current sales as PEV’s (PHEV’s + BEV’s). Plus, the original program was to offer a $10,000.00 Rebate, but that became actually $8,500.00 Max, plus $1,000.00 for installing a Level 2 Charger at Home! Then, it got changed again, with vehicles under $75,000.00 sale price getting $14,000.00 Max, and from $75,000.00 to below $150,000.00, it was a $3,000.00 rebate Max. As of February or so ths year, the $3,000.00 limit is gone and those qualify for the same battery determined $14,000.00 Max! Vehicles sold at over $150,000.00 are still at $0.00, after the update to the $14,000.00 Max. I don’t think the over $150,000.00 vehicles qualify for the $1,000.00 L2 Charging Station install program, since that followed having to get the Vehicle Rebate approved first. I believe all others below that price… Read more »

Typos:
Mire = More,
Hust = Just!

Mister G

With or without the federal tax credit, I’m getting a model 3, it would be foolish to drive a gas guzzler.

FCEImaging

Tax credit is what manufacturers talk about when promoting their EV products – all manufacturers, whether it be Chevy, Ford, Tesla, etc. When I test drove a Tesla, it was the first item mentioned by rep after he said hello. If the price of any vehicle goes up by $7500 because credit is discontinued for any reason sales will, in my opinion go elsewhere. There is a big difference between $30,000 and $37,500 purchases. How many gallons of petro can be purchased for $7500 – even at $5/gallon a vehicle getting 35 miles per gallon is going 52,500 miles – even for those interested in EVs this delta will play apart in the purchasing decision.

TP

If done right, EV prices should start to declining after the tax incentives expire. The $7500 in tax rebate to the purchaser, allows the manufacturer to cover more costs while ramping up a new segment. The idea is to help create enough demand for a manufacturer to reach economies of scale.

The question is, how much annual demand is needed to be able to manufacture and sell a BEV with 200+ mile range for $30k and still earn a profit on it.

Apart from Tesla, I don’t believe that any manufacturer has achieved the magic number needed yet. But, GM and Nissan may be close to achieving it.

George R

Tesla hasn’t done it either – at base price M3 doesn’t’ turn a profit according to what is being reported by analysts… last I looked Tesla doesn’t’ turn a profit selling high price MS and MX – building cars is difficult and expensive even when everything goes according to plan. GM and Nissan are probably closer to the ‘magic’ number than Tesla just based on their manufacturing experience.

Pushmi-Pullyu
“…at base price M3 doesn’t’ turn a profit according to what is being reported by analysts… last I looked Tesla doesn’t’ turn a profit selling high price MS and MX” It’s a big mistake to accept at face value the pumper or dumper promotion articles that masquerade as publicly reported “analyses”. In most if not all cases, those are intended as advertisements for either a pumping or dumping stock promotion. Tesla turns a pretty good gross profit margin selling the MS. I dunno about the MX; logic suggests that they probably don’t make as high a profit margin on that, since they haven’t had as many years as the MS to bring the price down. But it’s simply stock dumper (or short-seller) B.S. to say that “Tesla doesn’t turn a profit” on selling its cars, and we should know better than to repeat it. The only reason Tesla “isn’t profitable” on the basis of net profit is because it’s re-investing all its profits into company growth. Just as with Amazon.com, the company keeps growing even as investors continually complain that it’s “not profitable”. I doubt many people are still claiming that Amazon.com isn’t profitable! Hopefully it won’t be very many… Read more »
M3-Reserved - Niro-TBD

Selling the MS and MX definitely are profitable as purely gross profits at about 22%.

The issue is Tesla not turning a profit overall is because it’s burning to cash for capital investment and development — Gigafactory, NUMMI buildout, SolarCity purchase, M3 start up, Mobileeye replacement for AP.

Mister G

And tesla semi, tesla pick-up truck, model y etc..

Carguy

My accountant says the tax credit can be carried forward. The video says you cannot carry it forward. What gives?