Americans who are hoping to buy a new Tesla (TSLA -3.55%) are now on notice: The fat tax incentive that has helped boost Tesla's U.S. sales will soon start winding down. According to an update from Tesla, the tax break will start phasing out at the beginning of 2019.
That has implications for car shoppers -- and for Tesla's shareholders. Here's what we know.
A $7,500 tax credit for Tesla buyers will soon phase out
Under U.S. law, buyers of electric vehicles (EVs) are eligible to receive a federal tax credit worth $7,500. But there's a catch: Once an automaker sells 200,000 electric vehicles in the U.S., the tax credit starts to phase out for future buyers of that automaker's EVs. (Buyers of EVs from other automakers that have yet to sell 200,000 EVs in the U.S. will still get the full credit.)
How will a phaseout of the tax credit affect demand for Tesla's Model 3? Image source: Tesla, Inc.
The idea is that the tax break is supposed to help jump-start an automaker's production of electric vehicles, not to sustain it indefinitely.
Tesla said earlier this year that it expected to reach the 200,000 mark sometime in 2018. Sales projections suggested that it was likely to happen roughly in the middle of the year. But what wasn't clear, until now, is whether Tesla would hit the mark in the second quarter or the third.
That's important because the tax break starts to decline two calendar quarters after the quarter in which the automaker delivers the 200,000th electric vehicle. Buyers still get the full tax credit in that quarter and the quarter that follows. After that, the tax credit is halved (to $3,750) for two quarters, and then halved again (to $1,875) for the following two quarters. After that, buyers of that automaker's EVs are no longer eligible for the credit.
An update to Tesla's site on Wednesday makes clear that the company either passed the 200,000-U.S.-deliveries mark early in July -- or it expects to do so soon, before the end of the third quarter.
Here's what that means:
- Americans who buy Teslas in the third and fourth quarters of 2018 will continue to get the full $7,500 tax credit.
- Buyers in the first half of 2019 will get a credit of $3,750.
- Buyers in the second half of 2019 will get a credit of $1,875.
- Buyers after that get no federal tax credit.
It's important to note that the phaseout only applies to vehicles made by Tesla. Buyers of electric vehicles from automakers that have yet to hit the 200,000 mark will continue to be eligible for the full $7,500 credit.
So what does all that mean for Tesla?
Buyers hoping for a $27,500 Model 3 may be out of luck
First and foremost, it has big implications for those hoping to buy the shorter-range version of Tesla's Model 3 sedan -- and for those investors counting on Tesla's large backlog of Model 3 reservations to convert at a high rate.
There's reason to believe that many of the 420,000 Model 3 reservations that Tesla had yet to fill as of the end of the first quarter were from buyers hoping to purchase the most affordable Model 3, a stripped-down, shorter-range version that Tesla has promised will start at $35,000.
The problem: Tesla isn't making it yet. If you want to order a Model 3 today, you have three available configurations, with the cheapest starting at $49,000. As of right now, the Model 3 order page has a note saying that the "standard battery" will be available in six to nine months. That could mean that no shorter-range Model 3s will be delivered in time for buyers to receive the full tax credit.
How many of those 420,000 reservations are held by people hoping to get a $35,000 Model 3 and a full tax credit? We don't know. But as of right now, it looks like few -- if any -- will be getting both.
That won't help Tesla silence those who've been wondering if actual demand for the Model 3 is softer than the company expected.
Soon, Tesla buyers won't get the break -- unless they buy the competition instead
There's another issue that could put more pressure on Tesla's sales next year: Its tax credits will start phasing out just as serious competitors are hitting the market.
There's a growing list of Tesla competitors set to arrive over the next couple of years. The Jaguar I-Pace is already shipping in Europe, the Audi e-tron SUV will arrive next year, and the Porsche Taycan, the Mercedes-Benz EQC SUV, and several others will follow. All will be eligible to receive the full tax credit for at least several quarters after Tesla's is gone. That will give them all a net price advantage in the U.S. when compared to Tesla.
Starting in 2019, buyers of rival electric vehicles like the Jaguar I-Pace will get a bigger tax break than they'd get with a Tesla. Image source: Jaguar Land Rover.
Competing against the likes of Porsche and Mercedes-Benz was already going to be a stiff challenge for Tesla. Spotting them a $7,500 net price advantage won't make that challenge any easier.
The good news for Tesla is that it apparently managed not to cross the sales threshold until the third quarter. If if had crossed the 200,000 mark before July 1, buyers would have had to take delivery before Sept. 30 to collect the full tax break. That would put a lot of pressure on Tesla (and car-shoppers) to move quickly.
Tesla does have some breathing room before the tax break starts to phase out. But it may not be enough time to get the "affordable" $35,000 version of the Model 3 into full production -- and it looks likely to put Tesla at a price disadvantage just as serious competition begins to arrive at U.S. dealers.
The upshot: Some things are about to get more challenging for Tesla.
