How to Act Like Tesla
written by Brian Dudley, CFP® Founder+COO
On Wednesday evening last week, Tesla reported better-than-expected earnings, helping lift its stock back from a most recent dip. I mean, the stock is up over 400% YTD, so taking a break isn't abnormal. So how did they do it, and more importantly, what can you take away from their solid quarter? The common answer: tax credits. Let's explore.
Taxes, ahhh yes, so fun to discuss. Right on the fun level of having a tooth pulled or stepping on a LEGO.
Yep, not fun (for many), but they are so very important when managing your finances. A great CPA will help you pre-pay millions of taxes so that you can only pay $750 in a year, am I right? Okay, I am not going down that rabbit hole, but look at what Tesla did with its tax credits to help it beat analysis estimates for the fifth consecutive time. It's pretty sexy stuff, in my opinion. Tesla, a company that only produces electric vehicles, receives regulatory energy credits (at no charge from) to give it an incentive to build emission-free cars. CA (where Tesla calls home), for example, has a Zero Emissions Vehicle program offering credits. Since Tesla is only producing zero emissions vehicles, it racks up credits (rack city, rack rack city). What happens when you rack up so many credits that you do not need? You guessed it, you sell them. In this quarter, for example, Tesla sold $397 million of them. So let's do some math here: If you are given tax credits from the state of California in the amount of $0, and then you sell them for $397 million, you now have a profit of $397 million to report. That's free money, baby. All day errrry day is what Elon probably says to himself every night. Maybe not. But that being said, that's a huge amount of money that it was able to make as a company, just for doing what the company specializes in. Huge.
Okay, so what's that credit got to do with me? I got an advisor. I'm not trying to hear that, see.
First off, if you get that reference, you're definitely my people.
Second, the credit may have a lot to do with you, if you plan right. So before I begin on how you may be able to act like Tesla and get to use this strategy, let's back up and talk about credits and deductions in general.
The United States tax code provides tax credits and tax exemptions that can help reduce your taxes. The types of credits and exemptions will differ, depending on your personal situation. Most of you are aware of exemptions as they work like other deductions. An exemption will reduce your taxable income. The standard deduction for married couples is currently $24,400 if you file married filing jointly. If you make $200,000 as a couple, you then are able to take off $24,400 for calculating your taxable income. Your taxable income is now $175,600. Easy, right? The tax code says that for couples making $175,600 adjusted gross income will have a maximum taxable income of 24%. The US tax code, however, is progressive. What does this mean? It means that you are not taxed at a flat rate of 24% on all of your income. In this simple example, the married couple making $200,000 (less a standard deduction) pays 10% on the first $19,750, then 12% from there up to $80,250, then 22% from there up to $171,050, then 24% on the final balance. The effective federal tax income is 14.23% in this example ($24,981 owed to the Fed). There are, of course, state taxes, FICA taxes (payroll or social security tax) that are owed as well. But, I think you get the point.
Tax Credits, however, directly impact your tax bill. Let's use that same example as above (it's really simple, there are more things to a tax return, but just to get a base understanding) and let's take away their standard deduction for this simple illustration. Say the couple makes $200,000, but has a tax credit of $12,000. In this scenario, $200,000 has an effective rate of 15.25% ($24,981 owed to the fed). The credit, however, is dollar-for-dollar against the tax bill owed. The credit of $12,000 would lower the Fed bill down in almost half! $12,981.
The simple conclusion, credits are more valuable than exemptions.
Now back to Tesla and you.
"Cool, Brian, keep showing me how Corporate America continues to rake in free government money, while I have to pay what seems like too much money for this carnival movie scene we are all living in 2020."
Right, I get that. Here's the thing. If you are successful, and have amassed cash or wealth along the way, you too can use credits to your advantage.
I will tell you how. You buy them. Yup, buy them.
Yes. Buy them. Many states offer tax credits to companies for investments in film, rehabs for historic properties, low-income credits, renewable energy incentives (aka Tesla) and other incentives to help bring in companies to their respective state. Some states (including MA) allow the transfer of these credits to another taxpayer (you). The prices range (in MA say from $.84-.95 per dollar), but a company can sell you its state credits for you to use on your return. Here's an example. Let's say you balled out and made $2MM in 2020 (damn, Daniel). In simplistic form, you would then owe 5% state income tax in MA. That's $100,000 in taxes owed just to the state (again, damn, Daniel). If you happen to buy credits from a company willing to sell you those said credits for say 90 cents on the dollar, you can essentially save $10,000 (you buy $100,000 credit for $90,000 and then reduce tax by $10,000). You still owe $90,000, but that's still $10,000 less. That's $10,000 in savings. That's a trip to Europe (well, eventually). That's a contribution to a college account (not maxed, but still a nice addition). That's a new patio or upgrade to your bathroom or Rolex because you just made $2MM, you baller, you. You get it, it's more money for you to then use for you and not give to the government.
Okay, so how does this mean I am acting like Tesla? Didn't it sell these and make profit? I don't have these to sell.
You are right. But remember, Tesla has these credits to use. That's how you can act like Tesla. Buy credits at a discount and use them to offset your tax liability. This may not be a strategy for all, or even the masses. But, it may for the emerging wealth that are in their relentless pursuit of growth,
If you have questions, hit me up anytime.
As always, thank you for reading!
Note that this post references an advanced wealth planning technique. This technique is not specific advice for you or your family. Any advice on taxes should be in made in conjunction with your tax advisor(s). Triad Advisors does not give tax advice.