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Tesla Motors Inc (TSLA) Likely First Loser of This IRS Bonanza

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Tesla Motors Inc is expected to be the first automaker to lose a $7,500 federal tax credit available on the purchase of an electric vehicle (EV) in the U.S., according to a report from Plugless Power. Under the clauses in the Internal Revenue Service section code IRC 30D, when a manufacturer reaches 200,000 EV sales, a phase-out process of the credits begins that can take up to 18 months before the credit is zeroed.

Plugless Power, which offers wireless chargers for EVs, looked at the sales figures of different automakers and predicts that Tesla could become the first manufacturer to lose the credit.

Tesla Motors (TSLA) v GM Tax Incentives

Horserace Between Tesla and General Motor

The IRC 30D, better known as the Plug-In Electric Drive Vehicle Credit, allows for up to $7,500 off on federal taxes for the purchase of a new EV. The code has a sunset clause that is specific to each vehicle manufacturer’s success.

Looking at numbers gathered by Plugless Power, it appears that there is a horserace between Tesla Motors Inc and General Motors Company .

“Who will be first and when? That’s the $1.5-billion-dollar question but it’ll likely be a horserace between Tesla and General Motors (GM),” Steve Cummings writes in the report.

Why Could Tesla Win Race To Lose Federal Tax Credit?

According to the report, GM celebrated the sale of the 100,000th Volt on August 1. The portfolio of GM’s electric cars also includes the Chevy Spark and the Cadillac ELR.

It is expected that Tesla is crossing the halfway point right about now in September/October. The car maker does not report monthly sales or regional allocations because “it varies quite a lot by region and the media tends to read all sorts of nonsense into the deliveries,” CEO Elon Musk said during a recent conference call.

Answering a question from John Lovallo of Bank of America about reporting monthly sales, Must said:

“People assume deliveries are a proxy for demand, and that’s not the case. It is the case for other car companies but in our case, it really needs to be parsed into orders and deliveries. And bear in mind, there are a lot of things we could do to amplify orders. Orders is not a true measure of demand, it’s just a measure of what we need to do to meet our production and deliver number.”

Based on a few conservative assumptions and looking into the crystal ball, the Plugless Power report suggests that Tesla Motors Inc will cross the line first in the first quarter of 2018 followed shortly a quarter or two later by GM.

What Will Happen If Tesla Crosses 200K in January 2018?

When an OEM crosses the 200,000 mark, the phase out process could take anywhere from 16 to 18 months before the credit is zeroed out.

Assuming that Tesla will be able to sell its 200,000th EV in January 2018, still the full credit of $7,500 will be available for all cars sold in during the January-March 2018 period. The federal tax credit won’t fully disappear in the next quarter. Still, all cars sold by Tesla in the second quarter (April-June 2018) would get the full $7,500 credit. However, the reduction in the credit would start from July 1, the start of the third quarter of 2018.

This means all Teslas sold from January 2018 through June 2018 would receive the full $7,500 credit. And the credit would be reduced to 50% (i.e. $3,750) for vehicles sold from July 2018 through December 2018, and 25% (i.e. $1,870) for vehicles sold from January through June 2019.

It is important to note that “Sold” refers to “Delivered” to a U.S. buyer. It does not mean “Reservation.”

Shares of Tesla have tumbled over 16% during the last three months. The stock is down nearly 12% over the last 30 days. Most analysts are concerned about how Tesla will get capital to complete construction of its $5 billion Gigafactory, ramp up the Model 3 production and fund the acquisition of solar panel installer SolarCity.

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