Tesla will not be paying any federal taxes this year despite the brand recording one of its most profitable years on record. Furthermore, they may not have to pay federal taxes for some time to come either.
This comes from Tesla’s recent financial filing with the Securities and Exchange Commission, which reveals that the companies federal tax bill was the sum total of nothing. However, the company isn’t subject to no taxes whatsoever. Its foreign tax bill came to $839 million, while its state tax bill was a fraction of that, at just $9 million.
And, while Elon Musk may have tweeted that his tax bill would be roughly $11 billion this year, potentially the most significant individual payment to the Internal Revenue Service, he may not have to pay such federal taxes for some years to come, just like his company. So, how did Tesla manage to do it?
US Multinational Structuring
Although earning a net income of $5.5 billion and an adjusted income of $7.6 billion, the EV maker reported that the US side of its operations actually lost $130 million in 2021 (pre-tax). Tesla claims that over $6 billion of its pre-tax profits came from overseas operations, despite 45 percent of revenue originating from US sales.
Speaking to CNN, Martin Sullivan, chief economist for Tax Analysts, said that although it defies common sense, “it does not defy the US tax code.” Sullivan believes that Tesla may have used a commonly used structuring practice that allows their overseas operations to report income. The example given is that a company could assign its IP to a foreign unit, with the US arm paying a fee to use it. The US company meanwhile reports a loss or very little income.
“It’s a US multinational thing. It’s very common. It’s almost malpractice not to do that,” said Sullivan. Despite Biden vowing to crack down on these regulatory loopholes, not much has been done so far.
Could China Be The Reason?
Another theory floated as to why Tesla is claiming that profits have originated from overseas: that they really aren’t profitable at home and that China has been the “golden goose.”
Gordon Johnson of GLJ Research, a staunch critic of Tesla, believes investors are giving Tesla too much credit for US profits. Could it be that Tesla is losing money on cars made in the US but can turn a profit thanks to the lower costs of its new relatively new Shanghai factory?
Maybe not, because according to CNN, analysts who have poured over the books insist that, despite what the tax filings say, Tesla’s profits have originated from both home and overseas.
No Federal Taxes For Some Time To Come
Regardless of any debate surrounding where exactly Tesla’s profits have originated from, the fact of the matter is, the automaker doesn’t need to worry too much about future gains being taxed for some time.
Once again, it’s thanks to a common practice that companies including Amazon, General Motors, and Chrysler in the past have used to their advantage.
Tesla’s years of losses will result in a future tax break. These past losses are known as “net operating loss carry-forwards” and have accumulated over a decade of Tesla’s heavy cash burn during development. Thanks to the billions of dollars that Tesla has run up in losses, it has earned sizeable net operating loss carry-forwards that it could use in the future.
Furthermore, Tesla did not use those past losses to protect any part of its current income from taxes. And if the company continues to report its taxes as it did last year, it may never need to.
Meanwhile, Tesla CEO Elon Musk is reported to have paid no income tax in 2018. This is because he doesn’t earn a salary from Tesla. Musk’s recent tax bill was due to stock trades, with him having to exercise his options before they expired. But unless Congress passes some proposal to tax the rich on their net worth rather than their income, Musk may not have to face another federal tax bill until 2028, when his next round of stock options are scheduled to expire.