Elon Musk and Tesla Motors, masterful at mining state and federal tax incentives, may have lucked into a tax loophole. The company’s new $100,000-plus Model X electric SUV qualifies for a $25,000 federal tax deduction.
That’s on top of a $7,500 federal tax credit and a $2,500 California rebate given to buyers of battery-electric vehicles.
The right buyer, a small-business owner with a substantial federal tax exposure, could place an order for the new seven-seater and collect up to $35,000 in tax and government rebate benefits.
The windfall could produce a public relations backlash among people who may object to tax cuts for the rich.
“This is a high-priced vehicle that only wealthy people can buy,” said Karl Brauer of Kelley Blue Book. “There are a lot of people who believe we have already done enough to help Tesla.”
But industry analysts said they doubted Tesla built its Model X heavy to qualify for the loophole — since a principal goal in engineering battery electric vehicles is to reduce weight, as a way of extending range.
The loophole, identified as section 179 of the Internal Revenue Service code, was originally part of a stimulus package meant to encourage small-business owners to spend more freely on heavy equipment — urging farmers to buy new tractors, or contractors to buy new trucks.
Limited to passenger vehicles weighing more than 6,000 pounds — most passenger cars and light trucks do not qualify — the deduction became known as the “Hummer tax loophole” because it gave write-offs to buyers of the giant, gas-guzzling Hummer H1 and H2 military-style trucks.
Those road hogs, sold through General Motors dealerships, are no longer being made. But now their namesake loophole appears to apply to the exotic-looking Model X. Tesla’s second in-production car, after its current Model S, the “falcon-wing” SUV is expected to have a gross vehicular weight of a bit more than 6,000 pounds — based on statements Musk has made about his new car’s specifications.
The deduction could be a boon to sticker-shocked prospective Model X owners, who three years ago began putting down deposits for future deliveries of the futuristic crossovers and are just now beginning to see their orders filled. Six were delivered in a staged ceremony late last month, the first of the coveted cars going to Musk himself.
Though Tesla has yet to set a manufacturer’s suggested retail price for the base Model X, the first fully loaded “Signature Series” versions of the SUVs cost $132,000.
Musk has previously said the X would start at about $5,000 more than a comparably equipped Model S sedan, which would put the starting price at about $81,200 before federal and state incentives. The price could run much higher with options; the average transaction price for a Model S is about $100,000.
Morgan Stanley Research analyst Adam Jonas said he estimates the average transaction price will be $25,000 more than the comparable price of a Model S — “and easily $10k to $15k higher than we had expected,” he wrote.
Tesla declined to address the tax question, but a company spokesperson told the online auto news organization Autoblog that a deduction “could be taken for up to $25,000 of the purchase price.”
The tax deduction represents another coup for Tesla and Musk, which have already shown themselves adept at taking advantage of government programs.
Besides his roles as chairman and chief executive of Tesla, Musk is chairman of SolarCity Corp. and Space Exploration Technologies Corp., known as SpaceX. Together the three businesses have benefited from at least an estimated $4.9 billion in government support, according to data compiled by The Times.
The figure compiled by The Times comprises a variety of government incentives, including grants, tax breaks, factory construction, discounted loans and environmental credits that Tesla can sell. It also includes tax credits and rebates to buyers of solar panels and electric cars.
Tesla, for example, has sold about $600 million in government-awarded environmental credits generated by sales of its electric vehicles. Additionally, California has paid out more than $46 million in $2,500 clean vehicle rebates to Tesla buyers.
Musk has said the primary goals of his companies are to develop electric cars, space transport and clean energy. The credits and government support his ventures take advantage of, he has said, are far smaller than what’s garnered by other industries, especially the oil and gas business.
Tax experts cautioned that the $25,000 tax deduction isn’t the same as cash in hand.
In a theoretical situation, tax experts said, a California Realtor or sales rep who uses the vehicle mostly for work could buy a Model X for $100,000 and immediately qualify for the $7,500 federal income tax credit and the $2,500 California rebate, to reduce the vehicle cost to $90,000.
They could then deduct $25,000 from the taxable income on their tax return. If they’re paying 33% of their income to the feds, the deduction would reduce the tax bill by $8,250.
All the benefits — the tax credit, state rebate and deduction — could reduce the price of the Model X by $18,250. But the regulations also allow eligible taxpayers to depreciate what’s left of the price over five years. That would add roughly an additional $4,000 in tax savings for the year the Model X was purchased.
Tesla is not using the tax loophole exclusively. Eligible individuals can get the same $25,000 deduction with purchases of certain trucks and SUVs produced by other automakers, provided they are heavy enough and meet the same standards.
But the tax break may be an accidental windfall for wealthy buyers who don’t need one — the kind of buyer already attracted to Musk’s machines.
Tesla buyers are overwhelmingly educated, male and rich. Nine of 10 are college-educated men. Almost half list their occupations as professionals. Their median household income is $280,000, according to Strategic Vision’s New Vehicle Experience Study, research into more than 300,000 new vehicle buyers annually.
“The purpose for this was to get small-business guys to spend money on stuff to build their businesses, not to get someone to buy a bigger car,” said certified public accountant Robert Jones of the Los Angeles firm Jones & Malhotra. “This is more like a write-off for a guy who owns a successful business and was going to buy a nice car anyway.”
Is it common? “We’re doing it all the time,” Jones said.
The Tesla tax advantage produced a backlash from Taxpayers for Common Sense, a nonprofit group in Washington, D.C.
“If a Realtor is buying a station wagon to drive clients around and show houses, that might be considered appropriate, but with a Tesla you are leaving that realm,” said the organization’s vice president, Steve Ellis. “It’s more of a toy, and they are abusing the system.”
For now, it’s Tesla’s stock that is taking the abuse.
Shares of the Palo Alto-based company have dropped 24% from their three-month high of $282.26 on July 20, closing Monday down 2.3%, or $5.11, at $215.58.
Analysts cited various reasons for the slide, including fears that the automaker won’t deliver as many cars as it had promised this year, and that the price of the X would be higher than expected and cause buyers to cancel orders.