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Electric car maker fueled by tax subsidies

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Breanna Deutsch Contributor

Tesla Motors has been basking in praise ever since the company became profitable in the first quarter of 2013, but critics point out that the company’s success would not exist without accounting gimmicks and massive government tax credits.

Forbes reported that the electric vehicle is overvalued partly because much of Tesla’s earnings come from zero emission vehicle tax credits (ZEV). The ZEV awards a hefty $7,500 tax credit to anyone who purchases a zero emissions car.

California, the location of Tesla’s headquarters, gives buyers up to $12,500 of tax credits if they take home one of these cars.

If the company sells an $80,000 Model S sedan in California, over 15 percent of the profits could potentially come from tax subsidies.

California’s move to incentivize buyers to drive a Tesla is part of the state’s effort rid the roads of carbon dioxide emitting vehicles.

The California Air Resources Board (CARB) is setting requirements for all automakers. CARB’s goal is to have 1.5 million ZEVs on the road by 2025, or roughly about 15 percent of its operating vehicles. If car makers fail to meet CARB’s standards, they are penalized by being forced to buy ZEV credits from other manufacturers.

This penalty is the foundation of Tesla’s earnings. An auto-industry analyst at Gartner Group, Thilo Koslowski, estimated that Musk’s company will make $250 million by the end of the year selling these credits to other car makers.

At the end of its second quarter in 2013, Tesla had a revenue of $747 million, with $119 million of its earnings coming from tax credit sales. Almost 16 percent of its total profit came from selling ZEV credits to other auto makers.

Tesla earns around $25,000 to $35,000 dollars from tax credits on every car that it sells.

Tesla’s popular leasing program also makes the business appear more profitable.

When a person leases a $90,000 Model S for a three-year time period, the bank sends Tesla a check for the full amount. After the three year lease expires, Tesla must buy back the car and sell it for $46,000 dollars in order to repay the bank. If it is unable to find a buyer willing to pay that price, the car company must pay the bank out of its own pockets.

Some have criticized Tesla for this, calling the accounting practice “gimmicky.”

In the second quarter of this year, 30 percent of Tesla’s sales came from the leasing program.

Tesla is scheduled to produce 20,000 vehicles by the end of 2013 and hopes to manufacture 40,000 in 2014.

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