$7,500 Federal Tax Credit Bummer

[JerrySchultz]

The following was sent by our Fremont, CA based tax accountant. That said, we operate under three LLC's in Arizona. Because these are investment companies, we do not take a salary so here is what our accountant sent us.

The $7,500 federal credit for the Tesla isn’t going to happen. In order to take advantage of the credit, you have to have ordinary tax to offset the credit against. Unfortunately you only have self-employment tax and the credit can’t offset that. If you don’t use the credit in the year you bought the car, then you lose the use of the credit. I found that in the Form 8936 instructions for line 23, “If you cannot use part of the personal portion of the credit because of the tax liability limit, the unused credit is lost. The unused personal portion of the credit cannot be carried back or forward to other tax years.”

We own a 2015 90D, purchased new last August. Any tax experts on this subject?

 

[andrewket]

Can you find a way to create 7,500 of ordinary income?

 

[Johan]

Because these are investment companies, we do not take a salary

This is the crux of the issue. You must first have a taxable income from which you've paid a minimum of $7500 to use the credit to offset. So like Andrew said you must create enough taxable income for 2015, somehow.

 

[JerrySchultz]

OK, just off the phone with our tax accountant. It is so true that these gimmick tax deductions work only if you have qualified taxable income. And, if you really do plan on taking advantage this tax credit (in the future) and plan to purchase another Tesla, make sure you have some form of ordinary income proof (even an IRS 1099 that is filed by Feb 28th each year). On the other hand, never let anyone tell you investments don't offer numerous tax consequences, outside this $7,500 tax credit.

 

[ABCCBA]

@JerrySchultz - most people don't understand the Tax Credit. It is exactly that, a credit against Taxes Owed. If you have no taxes due, you get zero credit. If you owe $7,500 or more, you get a credit of $7,500 to reduce your taxes due. However, if you owe between $0 and $7,500, the credit is equal to the amount you owe, not the full $7,500. Per the IRS, the credit is a use it or lose it credit. It can not be carried forward.

This is also true for charging station equipment.

Best bet is to buy a CPO or Off-lease EV where the value of the car does not include a markup from the manufacturer for the Tax Credit.

Also, this really has nothing to due with earned income or taxable income. Simply Taxes Owed.

 

[markb1]

Certainly too late, but if the LLC had bought the Tesla, would it be able to get the credit?

 

[cpa]

I regret to inform you that your tax preparer is correct. The EV tax credit is only available to reduce your income tax, and not any other types of tax, like SE tax. Without looking at your returns, (and I am not asking ) but you must have some losses or NOLs coming in if you don't pay any income tax yet have to pony up self-employment taxes.

 

[cpa]

Certainly too late, but if the LLC had bought the Tesla, would it be able to get the credit?

Well, Mark, for starters the poster indicated that these were investment LLCs. It is difficult to justify purchasing an automobile inside an investment partnership as an "ordinary and necessary" business expense.

And while I have not researched the complexity of purchasing a Tesla in a pass-through entity, I believe that the amount of the credit available would tie directly to the income (and income tax owed) generated by that entity and further is quite likely going to be subject to AMT (unlike a personal use purchase.) And then there is the allocation of the credit issue between or among the partners since one owner will be receiving the benefit at the expense of the other owners, and it is quite likely that the partnership agreement (if any) did not contemplate this particular matter.

 

[Owner]

Also the income cannot be capital gains.

 

[ABCCBA]

Certainly too late, but if the LLC had bought the Tesla, would it be able to get the credit?

@markb1 - LLCs are pass-through entities and losses and gains are reported on the Member's K1 and the losses and gains are based upon the ownership allocation. Thus, the LLC would have to have a taxable gain to begin with. Then, that gain is divided by ownership allocation. The Gain would be reported on the Member's 1040A under Business Income. That income is added to any additional personal income. All individual deductions are applied against the Total Income to determine the individuals taxable income. Then, if any taxes are owed, only a proportional amount of the credit, based on the ownership percentage could be claimed. In general, it will be very difficult to claim the credit from pass-through entities on personal returns.

 

[ibdguru23]

Also the income cannot be capital gains.

That sucks...

 

[Sandman1962]

And Dividends?

 

[NewCow]

Wait, the $7.5k credit can not be used on self-employed tax? I pay a ton in self-employed taxes and was planning on claiming it when we get the 3.

 

[ChadS]

Also the income cannot be capital gains.

Really? I wasn't aware of that. Does anybody know more about this...is it written in to statute, or just an artifact of how taxes are calculated and when credits are applied?

I'm retired, so to get enough income to have a $7500 tax liability, it almost has to be capital gains. In fact I tried to do that in 2012 when I bought the Model S, but I forgot I was carrying forward a capital loss, which wiped out the gain so I didn't get to take the tax credit in any event. (I was still working in 2009 when I bought the Roadster).

 

[ABCCBA]

Wait, the $7.5k credit can not be used on self-employed tax? I pay a ton in self-employed taxes and was planning on claiming it when we get the 3.

Self-Employment Taxes are basically the FICA taxes covering Social Security and Medicare. There are no credits that are applied against them.

If you are self-employed, you pay your self-employment taxes and INCOME TAX based on your Adjusted Gross Income.

The EV Tax Credit only offsets any taxes owed from your Adjusted Gross Income, up to $7,500. As I explained above, the $7,500 is a maximum and is reduced to be only equal to the taxes owed if they are less than $7,500.

Finally, it really doesn't matter what type of income you have, the credit is not applied against income. It is applied against Taxes Owed. Look at a 1040A some time and see all the various types of income that drop down to you Adjusted Gross Income calculation.

 

[BrokerDon]

The other GOTCHA of owning a car inside an LLC is your auto insurer can classify it as a "commercial" vehicle which will almost assuredly trigger significantly higher premiums. YMMV but The Hartford (an AARP insurer) notified us of that when we tried to move our insurance on our LLC car to them... so we waited until that car sold and bought our Tesla personally instead of through our leasing company LLC. Solved higher insurance issue AND guaranteed $7,500 tax credit too.

 

[HankLloydRight]

Can you find a way to create 7,500 of ordinary income?

One would need to generate enough income to create $7500 in tax liability. If your effective tax rate is 20%, you'd need $37,500 of taxable income (adjusted) to claim the full credit.

 

[Lonnie123]

... So between the 2 people in this thread that couldnt take advantage of the credit that means Tesla can sell 200,002 cars before the countdown starts!!

 

[HankLloydRight]

... So between the 2 people in this thread that couldnt take advantage of the credit that means Tesla can sell 200,002 cars before the countdown starts!!

I don't think it's the number of credits claimed that matters, it's total US production. When they reach 200,000 vehicles sold, the tax credit is reduced two quarters later. Doesn't matter how many people can actually claim the credit.

 

[Lonnie123]

I don't think it's the number of credits claimed that matters, it's total US production. When they reach 200,000 vehicles sold, the tax credit is reduced two quarters later. Doesn't matter how many people can actually claim the credit.

I see, that makes sense