Tesla and General Motors have advanced the U.S. plug-in market by selling more vehicles than anyone else, and they will be first to hit a 200,000-unit federal tax credit cap this year.

Under IRS rules, after an automaker sells 200,000 PEVs, a four-quarter phase out period follows at a certain point which sees consumer credits of up to $7,500 per vehicle go away. When the tax credit eligibility ceases, if no extension is granted, Tesla and GM will lose a selling advantage other automakers will retain.

Fair or Unfair?

When the major manufacturer plug-in market began in the 2011 model year, battery costs and learning curves were steep. Automakers selling nationally available PEVs like startup Tesla and major manufacturer GM have thus paved the way for other automakers to ride in on ground plowed at their expense.

Plug-ins were so unprofitable or otherwise undesirable to the entrenched industry, even with federal and state monies to help prop them up, most automakers made little or no effort to sell more than a handful of vehicles. Some have made them exclusive to markets following California zero emission rules, and some have avoided them altogether.

Nissan and its one U.S. plug-in product, the Leaf, which it delayed longer than usual to redesign, is the only other comparable “heavy hitter.” Combined, it, Tesla, and GM are a veritable Big Three that carry the bulk of cumulative U.S. PEV sales. Nissan probably has 2-3 years to go before it hits 200,0000. BMW and Ford have also sold a fair number, but are nowhere near exhausting their credit eligibility.

Of this state of affairs, a cynic could opine of Tesla and GM that “no good deed goes unpunished.” Further, both standing to cede their advantage to Toyota, Honda, and others are U.S. companies – a fact that could further grate the sensibility of onlookers.

Of course, opinions on these issues may swing widely. For example, GM and Tesla are responsible for making corporate decisions they deemed best for themselves, and their investment has carved for them a ground floor footing in a nascent industry. It could be said they knew what they were getting themselves into, they opted to take their chances, and so from that vantage point, cries of unfair play may not be justified.

Further, others have questioned the validity of a federal tax credit – or whether it should have been as much, and, well, many other details. To be clear, the federal tax credit program saves vehicle buyers from a one-time tax liability in the tax year in which they purchase an eligible vehicle. It is not a payout from the tax base as some have incorrectly insinuated, but does deprive the tax base monies that would otherwise have gone in. It ranges from $2,500-$7,500 based on battery size and is intended to offset increased prices at this stage while automakers get up to speed meeting ever-tightening emissions and mpg regulations. Lawmakers have justified it as an investment in a new industry meant to help the environment, economy, lessen petroleum dependence, and improve energy security.

It has had across-the-aisle appeal as potentially positive, but, as noted, disagreements happen on the fine points.

Where Things Stand

A quick review of the numbers shows the Chevrolet Volt, launched Dec. 2010, has itself contributed to almost 134,000 of GM’s 200,000. Tesla’s Model S, launched June 2012, has contributed almost 119,000 out of 200,000.

Other vehicles from the two automakers are coming along in sales, particularly the Chevy Bolt EV which outsold the Volt last year, and Tesla Model X, which did not get up to speed until 2016, and is now selling in significant volume.

Tesla’s pending Model 3 of course is the car expected to propel Tesla like a rocket over the 200,000 limit to 300,000 or more by year's end.

According to Michigan-based analyst Alan Baum, who provided the chart, GM’s 168,183 units plus 43,500 forecast this year means it will probably reach 200,000 in the fourth quarter. Tesla, if it meets its production goals, could hit it very soon, but Baum suggests it could be a little later.

With 144,600 units to add to the existing 161,723 to date, 200,000 could be reached by the second quarter, or if Tesla stalls deliveries as has been postulated, it could delay until the third quarter or even longer.

Specifically, Tesla could buy time for itself if a 2016 speculative report proves true. The possibility to game the system was discovered after 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 that pending Model 3 owners could receive, Musk posted a vague response. “Our production ramp plan should enable large numbers of [new customers] to receive the credit,” Musk wrote.

Actually, it's been observed there's nothing stopping GM either from playing the hold-back-deliveries card to max out permissible sales with full credit eligibility.

Say, for example, it sees 200,000 coming. As is true also of Tesla, GM could, if it wished, stop deliveries to below that by a certain date stamp, and load its distribution network with cars ready to push to lined-up buyers.

At the beginning of the next quarter, an unlimited number of cars could go out in the next two quarters and buyers could receive full tax credits.

This could maximize customer happiness for both domestic makers, and would be an option if no extension is on the horizon.

The Law

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 rebates which are part of a pool of credits that remain 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 triggers the limit.

However, whenever Tesla or GM sell the 200,000th unit, this won’t mean a complete cessation of the credits, but it starts a two quarter countdown timer and then the up-to $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.

When is the deadline? The section in the tax law that spells out the 200,000 cap and credits fading away is under “phaseout period” 26 USC § 30D . The phase out period is the period beginning with the second calendar quarter following the calendar quarter which includes the first date on which the number of new qualified electric drive motor vehicles manufactured exceeds 200,000. So, if Tesla, for example, hit 200,000 on Oct 1, the phase out period would not begin until Q2 of 2019. If it held back, it could be longer.

Some have said they believe it unlikely the federal government will permit an extension above 200,000. On the contrary, they’ve said, the political climate in Washington is not at all sympathetic.

Last year an attempt to end the entire federal tax credit program was unsuccessfully tried by lawmakers breathing air very different than that of former President Obama, who smiled on things mirroring the ethic of Europe and that other small quasi country, California.

This said, nothing is set, and there is a chance an extension could be granted, according to
Jay Friedland, director/senior policy advisor for Plug In America.

Seeing the end drawing near, automakers including Tesla, GM, and others are lobbying, and a Republican-backed extenders bill sponsored by Senator Orin Hatch is currently on the table. It's believed this initiative, though relatively insignificant to lawmakers who perceive much bigger fish to fry, could get traction.

“A lot of people are working on it,” said Friedland of the issue of extending the tax credit cap, including legislators in states like Tennessee, Nevada, Alabama, and California, who are concerned about issues, including American jobs in their districts at stake.

In the current political environment, Friedland said he’d not place bets on if, or when an extension, or “expansion” above 200,000 might be granted, but any one of a number of tax bills could also see legislation buying space this for GM and Tesla – and others.