Editor's Note: This article was originally published February 25, 2016. As noted below, the $7500 federal tax credit only applies to the first 200,000 electric vehicles an automaker sells. Tesla surpassed 200,000 vehicles in 2018, meaning that the per-vehicle tax credit is being reduced. Customers who take delivery between January 1 and June 30, 2019 will receive a $3750 tax credit, while deliveries from July 1 to December 31, 2019 will get $1875. Deliveries in 2020 will presumably offer no tax credit, unless there is a change to the federal law.
In the last week of December, that the automaker will "cover the tax credit difference" for customers who expected their vehicles delivered by Dec. 31, 2018 but were delayed until 2019. And in early January 2019, Tesla announced it would take $2000 off the base price of every model, to partially make up for the $3750 reduction in tax credits on Tesla vehicles purchased this year.
Below is our original article from 2016, explaining how the federal tax credit works and why Tesla was bound to be the first automaker to reach the 200,000 vehicle limit. Again, the information below is from early 2016.
For anyone who plans to buy a Model S and wants to save some cash, you better get on it.
Many people don't realize this, but the federal incentives that allow consumers up to a $7500 tax credit on any plug-in vehicle begin to expire once a carmaker hits 200,000 units sold in the U.S. No manufacturer has hit that number yet, but Tesla should be the first. And when it will hit this cap has become a topic of .
Most estimates have Tesla hitting 200,000 U.S. sales sometime in late 2017 or the first half of 2018. The timing is important because Tesla's mass-market, $35,000 Model 3 (pre-incentives) won't go into production until 2017. Even without any major delays, there's a good chance only a relatively small portion of Model 3 sedans will be eligible for the full federal credit (individual state incentives would still apply). With delays—which is likely with Tesla— it could be even less. The second quarter after the cap is hit, the credit is halved for two consecutive quarters, and then it goes down to 25 percent for the final quarter before completely disappearing.
The Model 3 is a very important car for Tesla's hurting bottom line and the company's mission of getting more people in electric vehicles, so it's understandable why the 3's launch has received most of the focus. But let's not forget that the Model S and the Model X also lose those incentives. Effectively, in a little more than two years, the full rebate of $7500 could start disappearing. That's roughly the difference between a basic 85kWh Model S and an Autopilot-equipped 85 with the premium interior and Tesla's smart air suspension.
Two years might sound far off, but the way Tesla's reservation system works, the 200,000 cap could technically be hit much sooner. A reservation essentially saves your spot in line. With Model S sales , the Model X just now hitting full production, and Model 3 reservations beginning on March 31st, overall reservations will likely see a huge spike this year. This is especially true considering the highly anticipated Model 3 will only require a $1000 deposit, as opposed to $5000 or more for the Model S or X.
Tesla's reservation system and its impending loss of EV incentives also raise a critical question for potential Tesla buyers: How will they know if they are buying a vehicle that will qualify for the tax credit? In the immediate future, this isn't a concern, but as new reservations push Tesla closer to the 200,000 mark, buyers will essentially be ordering blind. Tesla doesn't make its reservation numbers public, and even then, there's no way to know how many reservations will actually convert to a final, delivered sale.
When ed about this pending problem, Tesla was forthright about the matter. "Tesla is aware of the issue and we are currently reviewing all available options to support our customers," a Tesla spokesperson told Road & Track.
If all of this hasn't been heady enough, there is also the chance that the incentives could be extended. Established in 2009, the incentives were meant to encourage carmakers to make more EVs by lowering the price enough that consumers would buy them. The thinking was that by the time companies started to hit these limits battery production costs, manufacturing issues, and the charging infrastructure would be sorted out enough that the market could sustain itself. With the Model 3, Chevy Bolt, and a host of new affordable EVs on their way, we'll see if that's true. If not, the credits might be extended to further prop up the industry. Just don't expect that to happen anytime soon with President Obama on his way out and political gridlock likely for whoever lands in the Oval Office.
Which brings us back to the whole point of this post: If you want a Model S or Model X and want to save some cash, you're best off buying one soon. There are way too many variables right now to hold out.