Published on January 20th, 2017 | by Loren McDonald0
Predicting When US Federal EV Tax Credit Will Expire For Tesla Buyers
January 20th, 2017 by Loren McDonald
One of the most frequent questions you see these days in electric vehicle forums, blog comments, Facebook groups, and here on CleanTechnica is some variation of the following:
“I reserved my Tesla Model 3 on (fill the date), will I still be eligible for the $7,500 federal tax credit when my car becomes available?”
There are several variables that go into answering this question, including:
- The date you placed your reservation for a Tesla Model 3 greatly determines the order you will be in the queue once Model 3s start rolling off the assembly line. Tesla has an estimated 400,000 reservations, which it began taking on March 31, 2016. If you put down a reservation on that first day versus, say, a few months later, you might actually be looking at delivery of 6–12 months after those early reservation holders. Later reservations may translate into the tax credit being phased down in amount or phased out entirely.
- Tesla and SpaceX employees and current Tesla owners are said to have first priority for confirming their order. And Tesla reportedly will deliver vehicles first to purchasers in the Western US (near the Fremont, California, factory). But we likely won’t know for certain the order of vehicle production for reservation holders until we get close to Model 3s actually starting to be built.
- And then, of course, is the number of vehicles (Model S, X, and 3) Tesla sells in 2017 and possibly early 2018 that brings the company’s total historical sales to 200,000 (more on this later).
- You must purchase (not lease) the vehicle to be directly eligible for the tax credit. If the vehicle is leased, only the lessor (not the lessee) is entitled to the credit. However, the leasing company should pass on the federal credit to the lessor in the form of lower monthly lease payments.
- And, of course, no one knows if the US Congress will decide to make changes to the tax credit, such as ending it completely, reducing the amounts of the credit, or changing the timing and levels of the phaseout of the credit.
How The Federal Tax Credit Works
Battery electric and plug-in hybrid vehicles purchased in or after 2010 may be eligible for the federal income tax credit of up to $7,500. The credit amount varies based on the capacity of the battery used to power the vehicle. All current Tesla models are (and the Model 3 will be) eligible for the initial full $7,500 credit. The Chevrolet Volt PHEV also qualifies for the full $7,500, for example, whereas the Ford Fusion Energi is only eligible for a $4,007 credit due to its much smaller battery.
The federal tax credit is phased out over time beginning the second quarter AFTER the quarter in which a manufacturer reaches a total of 200,000 BEV or PHEV vehicles sold since 2010. Here’s how the phaseout works:
- The full amount of the EV qualifying tax credit is in place DURING the entire calendar quarter in which 200,000 EVs are sold by a manufacturer, AND through the subsequent quarter.
- Then the tax credit amount is reduced by 50% ($3,750 for Tesla models) for the next 2 quarters.
- The credit is reduced again to 25% ($1,875 for Tesla models) of the original amount for the subsequent 2 quarters.
- At that point the credit expires completely.
So What’s The Big Deal?
So why is the question of availability of the federal tax credit such a hot topic? One reason is simply the impact the credit (or lack thereof) might have on someone making a purchase decision on a Model 3 at around $40,000, especially compared to the buyer of a $75,000 to $100,000+ Model S or Model X.
While I’m not aware of any data or surveys to support this, the logic is that some potential Model 3 buyers will change their mind if the tax credit (at the full $7,500 or one of the reduced levels) expires before their turn comes up to make the purchase.
The second reason for so much interest is that the question simply begs for speculation on what future sales will be like for the Model S and X and when Model 3 production will begin?
4 Possible Scenarios to Predict the End of the Federal EV Tax Credit for Tesla Buyers
Since no one knows how many cars Tesla will sell in the US in 2017 or when the Model 3 will begin production at scale, I’ve created 4 sample scenarios showing combinations of sales for the Models S, X, and 3.
While readers can argue with my assumptions and come up with another dozen variations, I’ve structured the scenarios so that regardless of the individual model sales numbers, Tesla would reach the 200,000 units sold milestone in 3 different and consecutive quarters, beginning in Q3 of 2017.
Scenario 1: This scenario is the least optimistic on the Model 3 production timing, with manufacturing not starting until Q1 of 2018. It does assume solid growth in sales of the Model S and X in 2017, but not enough to reach the 200,000 total historical sales milestone.
Scenario 2: This scenario is a bit of a mixed bag with sales of the Model S and X basically flat over 2016 (probably not likely, but these are scenarios after all). However, it is modestly optimistic on the Model 3 with production starting the second half of 2017, but with production still light and only beginning to ramp in Q1 of 2018. The 200,000 milestone is also not reached until Q1 2018.
Scenario 3: This scenario is reasonably optimistic and assumes significant growth in sales of the Model S and X in 2017, but that the Model 3 would not begin production until Q4 of 2017. Total Tesla historical sales would reach the 200,000 milestone in Q4 of 2017.
Scenario 4: This scenario is the most optimistic, which I decided to add after reading several comments on CleanTechnica where commenters were confident that Tesla would start production of the Model 3 in July 2017. It assumes significant growth in sales of the Model S and X in 2017 and that Tesla scales production of the Model 3 at an average of 10,000 units per month in Q3 of 2017. Total Tesla historical sales would reach the 200,000 milestone in Q3 of 2017.
Production Delay Theories Debunked
I’ve read a variety of theories that suggest Tesla would delay production of the Model 3 (or perhaps the S and/or X as well) or shift production to non-US orders as a means to delay the phaseout of the tax credit so that more US buyers can take advantage of it.
While this is certainly a possibility, I think Tesla taking this approach is extremely unlikely for a few reasons:
- The 200,000-unit milestone is considered to be in the specific calendar quarter it happens, not the exact date. So unless, the 200,000-unit number was likely to happen in the last week or so of a quarter, it would mean delaying many thousands of cars from being delivered for several weeks to new owners. Tesla would receive a firestorm of negative press and social media attention if people got wind of this approach.
- If Tesla did delay delivery of orders, it just pushes out 3 months the start of the 5 quarters of availability after the quarter in which the milestone is reached.
- And even if Tesla leadership thought it was a good idea to delay reaching the milestone, it ignores that Tesla is a publicly-traded company and under intense scrutiny by Wall Street and shareholders to meet both unit and revenue targets. And the reality of delaying production would simply mean that perhaps 25,000 buyers would lose out on the $1,875 (25% of the $7,500) that would have been available for one later quarter. I doubt that would be worth disappointing analysts and investors.
Tax Credit Phaseout
These scenarios provide a useful model for the phaseout period of the tax credit. As you can see from the chart below, the earliest that the tax credit would end entirely is at the end of Q4 of 2018 and the latest is Q2 of 2019. So, if you are a US citizen and are a current reservation holder for a Model 3, there is a good chance that either the full $7,500 or partial credit will still be available for your purchase.
Additional Resources on the Tax Credit:
- Edmunds — Electric Vehicle Tax Credits: What You Need to Know
- IRS Form 8936 (Form required to file with your tax return)