How Many Tesla Model 3 Buyers Will Be Eligible For $7,500 Federal Tax Credits?

More than the most anticipated electric car of 2017, Tesla’s Model 3 may be the most newsworthy car of any type, but the odds of anyone getting one for under $30,000 may be close to nil.

Tesla has said the 215-plus mile EV will be priced from $35,000 and some news stories initially fluffed up the notion that after adding in a destination fee, and subtracting a $7,500 federal tax credit, some buyers may net it for the high 20s. To be sure, as we’ll delve into below, a certain number of buyers will get a $7,500 credit, but Tesla’s eligibility for the federal credit should be gone before any $35,000-plus-destination Model 3s are sold.

While some have said the Model 3 won’t even get here before the end of they year, Michigan-based analyst Alan Baum recently upgraded his former 5,000-unit projection to 12,000 units in the last three months of 2017 – from October through Dec. 31.

The Model 3 was the closest thing to a new iPhone release in the world of automobiles.

At issue is the Model 3 is expected to be released first to an incredibly long line of paid reservation holders with more expensive models delivered first, and by the time a base Model 3 shows up, a 200,000 total vehicle cap under federal law will have been reached.

SEE ALSO: Musk: Model 3 Price Will Probably Average $42,000 With Options

First up are to be “Founders” edition cars. Baum’s initially conservative 5,000-unit 2017 sales estimate was based on Tesla’s history of a slow production startup. The Model X exemplified how that worked. Tesla did manage to deliver the first few Model X Founders and Signature series examples starting at the end of Sept. 2015, but for the entire year due to teething problems with the complicated car, it delivered fewer than 300 units by Dec. 31.

The Model 3, thanks to a simpler-to-produce design and an assembly line intended for mass volume, ought to get up and running much quicker, and giving benefit of the doubt to CEO Elon Musk’s optimism citing new production capabilities, 12,000 are now projected.

The (Estimated) Numbers

Where things get fuzzy is Tesla does not report month by month sales numbers, and only confirms volumes later, such as during quarterly earnings reports.

This said, the big picture is clear enough where things ought to stand when Model 3 gets here.

Through December 2016, Tesla had sold 111,753 units consisting of the Model S and X. Beyond that a few Roadsters may also have qualified. That meant it had 88,247 or less to go before a phase-out process begins which we’ll explain in a bit.

For calendar year 2017, Baum conservatively estimates 28,500 Model S sales, 16,300 Model X sales, and 12,000 Model 3 sales. These are just projections, but for now going with them, by end of 2017 Tesla may have sold 168,553 out of 200,000 eligible vehicles.

2018 is the year Baum expects things to really heat up, and the remaining 30,000 or so credits will quickly evaporate.

For the year, an estimated 23,800 Model S units would be sold – yes, a decline for Model S is projected, while an increase in Model X sales to 19,500 sales is in turn projected. The Model 3, Baum estimates, could see 105,500 units.

As buyers are aware of the imminent drying up of tax credits, this also may stimulate sales to a point.

What month in 2018 might the last car eligible for the full $7,500 federal credit be sold?

This is anyone’s guess, but Baum estimates maybe 3,500 Model S and X sales per month plus 5,000 Model 3 sales for the first three months in 2018. So, figure a rough napkin estimate of 8,500 units per month through March equaling 25,500 out of a bit over 30,000 remaining, thus by April a threshold could be met.

It should be noted that while Baum has given Tesla slightly more benefit of the doubt than in past projections, he is not passing along unfiltered the bold declarations of Elon Musk speaking of total production intended for global production.

“Our Model 3 program is on track to start limited vehicle production in July and to steadily ramp production to exceed 5,000 vehicles per week at some point in the fourth quarter and 10,000 vehicles per week at some point in 2018,” said Tesla’s most recent quarterly letter. “To support accelerating vehicle deliveries and maintain our industry-leading customer satisfaction, we are expanding our retail, Supercharger, and service functions.”

On a conference call, Musk himself projected for the Model 3 by July to be coming off the line at 1,000/week, by August 2,000/week, and by September 4,000/week. In 2018, he anticipates 500,000 vehicles produced, and by 2020, 1 million.

If Tesla’s projections are correct, while some of the much-larger volume of cars than Baum projects will not go to the U.S., the credits could be gone before 2017 is over.

Otherwise, keeping to Baum’s numbers, how many Model 3 buyers in total may get the full $7,500 credit? It could be 12,000 in 2017, and another 17,000 or so in 2018 plus an undetermined additional number during the time period after the 200,000th U.S. sale has been met. At this stage credits will still be available, but due to be ceased.

So, this is a loose estimate, though as we’ll see below, loopholes or other caveats potentially stand to increase this projection.

About Those Credits

After 200,000 U.S. sales are hit, under the Trump administration, it’s not believed Congress would extend the credit eligibility for Tesla, though this remains to be seen.

Otherwise, whenever Tesla sells its 200,000th unit, this won’t mean a complete cessation of the credits, but rather the $7,500 tax credit is by IRS law halved for two quarters to $3,750, then it’s halved again to $1,875 for a couple more quarters, then it goes to zero.

The section in the tax law that spells out the 200,000 cap and credits fading away over the following year is under “phaseout period” 26 USC § 30D. Not incidentally, the tax credits will of course phase out for all Tesla models, not just the Model 3.

The 200,000 credit cap under IRS rules is based on units sold – not credits applied for as has been the case, for example, with California state credits which are part of a pool of credits that remains until extinguished. For this federal law, regardless whether consumers’ tax situations make them eligible to apply for credits or not, once 200,000 units are sold, a manufacturer is at the limit.

Anything is Possible

At the present rate of sales, and assuming projections are close, the Model 3 – and all Tesla cars – will begin losing eligibility by spring 2018.

That said, a speculative report based on hints Musk gave that Tesla may effectively game the system leaves open possibilities. Last year, a few Tesla customers and analysts noticed a potential loophole in the IRS rules: the $7,500 credit isn’t cut until the end of the quarter after the one in which a company hits its limit of 200,000 cars delivered in the U.S. Tesla could extend that time period by reaching the limit on the first day of a quarter then deliver Model 3s over the next six months before the credit begins to disappear.

“We always try to maximize customer happiness even if that means a revenue shortfall in a quarter,” Musk replied to comments in an April 3, 2016 post on Twitter.

When asked whether he thinks Model S and Model X tax incentives will exhaust the remaining credits, Musk posted a vague response. “Our production ramp plan should enable large numbers of [new customers] to receive the credit,” Musk wrote.

How things will go is to a degree yet up in the air, but the Model 3 will likely still be the biggest news of the year, and into 2018, as Tesla projects large volumes not just within the U.S., but to its expanding global markets as well.


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