With Tesla getting the Model 3 into volume production, many people are wondering about the federal EV tax credit and how it works. Where to begin? As Huckleberry Finn liked to say, “Start at the beginning and when you get to the end? Stop.” That seems like pretty good advice, so that’s what we here at CleanTechnica decided to do.
Way back in 2005, Congress enacted a tax credit to encourage people to buy hybrid cars like the Toyota Prius. That program expired in 2009 and was replaced by a similar program designed to encourage the purchase of plug-in hybrid and battery electric cars. Notice this is not a tax deduction, which reduces a person’s taxable income. It is a credit against the tax owed after all the figuring and calculating is done. So if you owe the IRS $7501 in federal income tax and you bought a qualifying electrified car during the year, you only have to send the government a check for a buck.
But there’s a catch. (Isn’t there always?) If your tax bill is less than $7,500, your credit is limited to what you owe and any excess cannot be carried over to subsequent years. For example, if you purchase a car that is eligible for the full $7,500 credit but you only owe $3,897 in federal tax, the total benefit you will get from the law is $3,897, not $7,500.
Here’s how the Internal Revenue Service describes it on their website. “For vehicles acquired after December 31, 2009, the credit is equal to $2,500 plus, 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. The total amount of the credit allowed for a vehicle is limited to $7,500. 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).”
This has all become relevant recently because Tesla is bumping up against that 200,000 vehicle limit as manufacturing of the Model 3 ramps up. It may have already passed the limit. (Check out this fresh piece from Loren McDonald for a deeper dive on Tesla sales and the tax credit.) So, what happens after a manufacturer passes 200,000 total sales? The IRS has that covered as well.
“The qualified plug-in electric drive motor vehicle credit phases out for a manufacturer’s vehicles over the one-year period 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 for use in the United States (determined on a cumulative basis for sales after December 31, 2009) (“phase-out period”). Qualifying vehicles manufactured by that manufacturer are eligible for 50 percent of the credit if acquired in the first two quarters of the phase-out period and 25 percent of the credit if acquired in the third or fourth quarter of the phase-out period. Vehicles manufactured by that manufacturer are not eligible for a credit if acquired after the phase-out period.”
What Does It Mean?
Not proficient at deciphering bureaucratese? No problem. That’s why we’re here. Let’s assume by June 30, 2018, Tesla sold 199,990 electric cars in total since December 31, 2009. That means it won’t reach the tax credit cutoff until the third quarter, which ends September 30, 2018. And that means it can sell all the electric cars it can manufacture during that quarter and the following quarter and all of them will qualify for the full $7,500 tax credit. Regular readers will note that Tesla reported it had 10,000 Model 3 sedans “in transit” as of June 30. “In transit” cars are not “sold” cars.
Did Elon Musk game the system by holding back enough car deliveries to gain one extra quarter of the full federal tax credit for Tesla customers? On April 3, 2016, Musk tweeted, “We always try to maximize customer happiness even if that means a revenue shortfall in a quarter.” A few months ago, the investment community was fixated on whether Tesla would reach its self-imposed goal of making 5,000 Model 3s a week by the end of June. Now that it has reached that milestone, people who are not fans of Tesla and Elon Musk are saying the company is doomed if it doesn’t show a profit soon. Did Tesla sacrifice a bit of income in Q2 in order to extend the time for its customers to claim the full federal tax credit? You decide.
Assuming Tesla passes the 200,000 car threshold in Q3 of this year, starting in January of 2019, its customers will be eligible for one half the credit — $3,500 — through June 30, 2019. For the second half of next year, they can claim one quarter of the credit — $1,875. So, it will be January 1, 2020 before there will be no federal tax credit available at all to Tesla customers in the US.
The Federal Tax Credit Going Forward
Last fall, the entire federal tax credit for electric cars was under attack in Congress but somehow survived the budget cutting ax. Now, Tesla is saying the program should be cancelled or significantly revised. “What matters is whether we have a relative advantage in the market,” Musk said during an earnings conference call last year according to a report in the New York Times. “And in fact the incentives give us a relative disadvantage.” That’s because the credit will soon disappear for Tesla buyers but will remain in effect for other manufacturers that have been slower to bring competitive electric cars to market — companies like BMW, Mercedes, Audi, and Volkswagen, for example.
Last week, Congressman Peter Welch of Vermont introduced a bill to eliminate the per manufacturer cap and make the credit available to an unlimited number of EV buyers for the next 10 years. It is unlikely that Congress will approve the measure, but it addresses one of Musk’s concerns — that companies that sat on the sidelines for the past 5 years will now have a competitive advantage over those who stepped up and brought electric cars to market. He has a point.
Some critics of the tax credit plan argue that the money the government spends on it would be better invested in developing electric car charging infrastructure. They also have a point. What happens to the program is hard to predict, especially in a tumultuous election year. Suffice to say, if you want a Tesla and you want the full $7,500 tax credit, it appears you have until the end of this year to get yours.
Note: The IRS doesn’t care about anything CleanTechnica says on this subject. If you want definitive information on the federal electric car tax credit, you should consult a qualified tax adviser.
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