Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable

[The Accountant]

Speaking of Elon's compensation plan, is there any reason (beyond the 5 year lock up period) for Elon to not wait until the end of the plan period to exercise vested options? By waiting, is he improving the per share financials, or does the diluted number take into account ungranted shares (seems like it shouldn't since he could choose not to exercise)?

This is a factor to consider. Elon has until January 20, 2028 to exercise any tranches vested. If he waits until then, the large tax deduction won't be realized until 2028. There are however stock option tax deductions for other executives and employees but not to the extent of Elon's CEO Award.

 

[joh01652]

Elon said yesterday on Twitter that FSD visualization may come to cars next month (not FSD control, just visualization). That could be a driver for future FSD take rate...

Tesla FSD visualizations poised for rollout on non-FSD Beta cars next month

Tesla Full Self Driving visualizations are coming to non-FSD vehicles soon, as per recent comments by CEO Elon Musk on Twitter. According to the CEO, the option to activate FSD visualizations may be rolled out to drivers in areas such as Europe around next month. Musk’s comments came as a...

www.teslarati.com

 

[mongo]

Competition is bricking ... time for some tweets from @mlevine

https://twitter.com/x/status/1440664951585062913

While the Tweet is new, the article is from April...

 

[Artful Dodger]

This is a factor to consider. Elon has until January 20, 2028 to exercise any tranches vested.

When would Elon execute his stock options in order to minimize his personal taxes in a rising SP environment, earlier or later? TIA.

 

[snellenr]

Elon said yesterday on Twitter that FSD visualization may come to cars next month (not FSD control, just visualization). That could be a driver for future FSD take rate...

Tesla FSD visualizations poised for rollout on non-FSD Beta cars next month

Tesla Full Self Driving visualizations are coming to non-FSD vehicles soon, as per recent comments by CEO Elon Musk on Twitter. According to the CEO, the option to activate FSD visualizations may be rolled out to drivers in areas such as Europe around next month. Musk’s comments came as a...

www.teslarati.com

I’m curious whether the FSD visualization can be displayed on the back seat screen in the new Model S (in addition to the driver’s screen, of course) just to entertain/amaze the passengers. Does anyone know???

 

[CreativeName]

With the stock run up, it is now likely that tesla will have Tax Losses even when they have Financial Statement Profits.
Stock options (when exercised) have a higher expense for tax purposes than for the 10k.

For example, Elon's CEO award when fully expensed will have cost Tesla $2.3B in the financial statements.
But if Elon exercises at today's price of $740, it would be a $68B tax deduction. If he exercises at $1,500/shr it would be a tax deduction of $144B.

Some of the tax benefits have Expiration dates ranging from 2024 - 2037.
However I estimate that about $300m to $400m of the tax benefits have no expiration and it's possible that Tesla could take this into earnings as there is no concern about these benefits expiring.

Wouldn’t Sec. 162(m) limit the Company’s tax deduction on any compensation (including stock option exercises) to Elon and any other “covered employee” to $1 million per year? Thus, the stock compensation itself would not create additional tax losses.

Of course, assuming that is the case then the deferred tax asset equal to the book expense for Elon’s stock option expense would not meet the “more likely than not” threshold and would warrant a valuation allowance that would never reverse and ultimately just get written off.

 

[UkNorthampton]

Tesla related: additional support for EVs/renewable energy/storage and stricter controls on ICE inc Hybrids may be coming across much of the world

WHO slashes guideline limits on air pollution from fossil fuels

Level for the most damaging tiny particles is halved, reflecting new evidence of deadly harm

www.theguardian.com

 

[The Accountant]

Wouldn’t Sec. 162(m) limit the Company’s tax deduction on any compensation (including stock option exercises) to Elon and any other “covered employee” to $1 million per year? Thus, the stock compensation itself would not create additional tax losses.

Of course, assuming that is the case then the deferred tax asset equal to the book expense for Elon’s stock option expense would not meet the “more likely than not” threshold and would warrant a valuation allowance that would never reverse and ultimately just get written off.

Interesting point. I'm not a tax expert but you may be on to something.
Paging @st_lopes for his thoughts.

 

[Chunky Jr.]

China breaking records...

https://twitter.com/x/status/1440677851611627535

 

[st_lopes]

Regarding the 1st question above, does the release of Beta v10 allow for the recognition of Deferred Revenue to the income statement, I think Tesla may have some wiggle room here. I think they could argue to the Auditors yes and no. So it may give them flexibility for earnings.

The No Argument - Beta v10 is still in Development and the new users are helping to further develop FSD.
The Yes Argument - We have delivered the full commitment of FSD to a subset of our customers and can now recognize revenue.

This is why it is difficult to determine whether we will see FSD deferred revenue recognized in Q3 or Q4.

I agree that as Beta is granted to more users the portion of deferred revenue attributable to those users will likely be recognized. I expect it to be a slow burn in Q4 though, with a likely meaningful impact in 2022. Will be less relevant as FSD moves to monthly, where full recognition will likely occur each month.

Interesting point. I'm not a tax expert but you may be on to something.
Paging @st_lopes for his thoughts.

Hmm I would need to dig in to that. I’m not aware of a similar “covered person” cap in Canada which is where my knowledge base ends, but does seem plausible.

That said your thesis around the timing of tax benefit recognition being dependent on the extent of tax deduction available due to stock benefits is generally consistent with my understanding. Absent another tax reform in US it may be a couple years before we see a recognition of that tax benefit. Although Fremont focusing exclusively on domestic market is helpful in accelerating that.

 

[Artful Dodger]

@elonmusk now has 60 million followers on Twitter.

 

[mongo]

When would Elon execute his stock options in order to minimize his personal taxes in a rising SP environment, earlier or later? TIA.

Earlier, after Texas tax residency is established to avoid state income taxes (0% vs CA's 13.3%), but I am not an accountant. Moving Avoids California Tax? Not So Fast

Either point in time blows past the highest federal income tax bracket so that is a non-factor. However, after exercised, further growth will be taxed as long term capital gains (shares will be held more than one year due to plan's 5 year holding period), so sooner would work better for him based on that.

Another factor is that he must pay both taxes and the three fivetyish basis (presplit) on the options. Therefore, the more the stock is worth, the more shares he ends up with after exercise. Right now, ~10% of redeemed shares would go toward share purchase. That is less than the difference between his marginal tax rate (37%) and long term capital gains (20%), so not worth delaying further.

All bets are off if either tax rate changes.

Loans against holdings are another factor that might sway things.

 

[TheTalkingMule]

Do you people really think Elon will need to "cash out" before traditional state taxes are long gone? I gotta think he has access to unlimited funds for Mars without touching TSLA shares.

You may be underestimating the impact of society not having to pay for a finite fossil energy supply!

 

[StarFoxisDown!]

Do you people really think Elon will need to "cash out" before traditional state taxes are long gone? I gotta think he has access to unlimited funds for Mars without touching TSLA shares.

You may be underestimating the impact of society not having to pay for a finite fossil energy supply!

Besides, Tesla will be so cash flow and profit positive in 7-8 years that Tesla will pretty much have to start giving dividends........Elon could easily just live off the dividends and support his mission to mars with the amount of shares he has.

I really see a scenario in 7-10 years where the situation may be similar to Apple........Tesla wil have proven out all the major things they've set as goals....probably already entered the aviation space in 7-10 year time. At which time, Elon takes a clear step back and gives the reigns to Zach/Drew....similar to how Tim Cook was given the reigns.

Some might view this as a negative in that Tesla will stop innovating. But to me, the mission is kinda done at that point.....I'll gladly take a dividend from a company that's valued at 3+ trillion

 

[CreativeName]

I agree that as Beta is granted to more users the portion of deferred revenue attributable to those users will likely be recognized. I expect it to be a slow burn in Q4 though, with a likely meaningful impact in 2022. Will be less relevant as FSD moves to monthly, where full recognition will likely occur each month.

Hmm I would need to dig in to that. I’m not aware of a similar “covered person” cap in Canada which is where my knowledge base ends, but does seem plausible.

That said your thesis around the timing of tax benefit recognition being dependent on the extent of tax deduction available due to stock benefits is generally consistent with my understanding. Absent another tax reform in US it may be a couple years before we see a recognition of that tax benefit. Although Fremont focusing exclusively on domestic market is helpful in accelerating that.

For context, I am a U.S. CPA that focuses on corporate tax. Unless there is tax reform that removes or makes Sec. 162(m) more lenient (not the direction I would expect it to go if it were to be modified), then I would not expect Tesla to get a meaningful tax deduction for Elon’s stock options. My point being that I would not foresee Elon’s stock plan to be the reason a valuation allowance on loss carryforwards to be maintained. Plenty of other potential reasons, but I don’t see that as one.

 

[Artful Dodger]

My best estimate after watching Tesla’s corporate behavior over the last 12 years is that they will not recognize FSD revenue in Q3 or Q4. I think it’s more likely to be Q1 or Q2, when FSD may be reasonably safe enough to release to the masses even without a driver safety review.

This also would line up with traditionally lower demand quarters to supplement revenue, although with demand so high now that doesn’t appear like it will be a factor.

I'm not so sure about that. Remember what happened with Tesla's rollout of the core FSD feature "Smart Summon"? This is what Elon tweeted on Oct 11, 2019:

Elon Musk on Twitter: "Now that Tesla V10.0 with Smart Summon is out, Full Self-Driving price will increase by $1000 on Nov 1"

That software was good enough to satisfy the feature set requirement, and Tesla started booking the revenue for that portion of FSD on the next quarterly income statement (they also booked the deferred revenue for that feature).

Now most people (including Elon) would say the feature wasn't very capable at that time, but it had a non-zero chance of working. That was (and likely still is) the accounting standard for "feature complete", not that it's perfect or even really good. Obviously, with the 3-D vector virtual world that FSD v10 now drives in, Smart Summon (and everything else done by FSD) is getting better. But that IS NOT how the Accountants book the revenue, which is simple by the "feature complete" standard.

So I expect Tesla will book the balance of FSD revenue for "Navigate on City Streets" as soon as it meets the Accounting standards for a software deliverable, not any subjective quality of use standard.

Cheers!

P.S. Elon talked about what he means by "feature complete" on Feb 19, 2019 on the ARK podcast: On the Road to Full Autonomy With Elon Musk — FYI Podcast

Elon added the caveat that FSD would not 'work perfectly' and it would require supervision. There has been plenty of discussion about what "feature complete" means here at TMC

 

[Krugerrand]

That said your thesis around the timing of tax benefit recognition being dependent on the extent of tax deduction available due to stock benefits is generally consistent with my understanding.

Had you said: based on the aforementioned heretofore subsequent analysis of the juxtaposed portentous event -

Had you said that, I’d have understood. But this stuff above, that you wrote, is the biggest butter croissant I’ve ever read. It exceeds any marshmallow Peep written by @The Accountant. Shame on you!

 

[Artful Dodger]

Tantalizingly close now to "filling the gap" to last Friday's trading range, only $1.66 more to go as of 11:00 a.m.

C'mon, u kin do it !

Cheers!

P.S. Got to within a penny by 11:53 a.m.

 

[st_lopes]

For context, I am a U.S. CPA that focuses on corporate tax. Unless there is tax reform that removes or makes Sec. 162(m) more lenient (not the direction I would expect it to go if it were to be modified), then I would not expect Tesla to get a meaningful tax deduction for Elon’s stock options. My point being that I would not foresee Elon’s stock plan to be the reason a valuation allowance on loss carryforwards to be maintained. Plenty of other potential reasons, but I don’t see that as one.

Happy to have you come out of the woodwork!

They will continue to get the benefit of tax deductions on all the other options and RSUs available to all other employees though, correct (subject to the 162(m) cap. While not 10s of $Bs it would still be a significant number relative to the ~$2B of VA they currently maintain. I laid out my thought process on potential timing of recognition upthread (Wiki - Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable), would love your input, and feel free to come nerd out in the Near-future quarterly financial projections thread!

 

[st_lopes]

Had you said: based on the aforementioned heretofore subsequent analysis of the juxtaposed portentous event -

Had you said that, I’d have understood. But this stuff above, that you wrote, is the biggest butter croissant I’ve ever read. It exceeds any marshmallow Peep written by @The Accountant. Shame on you!

Sorry... i'm coming out of writing a memo for a client... shame on me indeed