Next month, Tesla Motors (NASDAQ:TSLA) will show off its highly anticipated mass-market electric car, the Model 3. The unveiling date is set for March 31, and the company will begin taking in-store reservation payments on that date. Online reservations will start the following day on April 1. Tesla is reiterating that everything is currently on schedule for a late 2017 launch, including the all-important $35,000 starting price tag.
The mass-market affordability of the Model 3 may potentially drive incredible demand and early reservations, but there are a few things you should keep in mind if you're planning on putting $1,000 down to get in line.
Reservation sequence does not matter as much
Tesla won't be fulfilling reservations on a first-come, first-serve basis. Instead, the company will prioritize "relatively highly optioned versions of the car," much like it has done with previous vehicle launches. This is done to recoup the capital investments necessary for the tooling and manufacturing infrastructure.
Consider the Model X. Even after the fully loaded Signature series, Tesla is producing the 90D configurations before moving to the 70D models, independent of reservation sequence number. Tesla has even stopped displaying sequence number for reservation holders because it has no direct bearing on production timing. For Model 3, there will be no Signature series, but the configuration that a customer chooses will ultimately have the most impact on when that customer can expect to receive his or her car.
That being said, earlier sequence numbers for the Model X were invited to configure sooner. Once those configured orders are confirmed, then the production priority comes into play. So sequence number will probably have some relevance on when you can configure, but it does not guarantee production priority.
Federal tax credit uncertainty
This is probably the most important part, so listen up. There is a lot of uncertainty regarding the $7,500 federal tax credit, which is why it's smart for Tesla to focus its message on the pre-tax sticker price of $35,000.
For starters, the $7,500 federal tax credit begins to get phased out after a manufacturer reaches 200,000 cumulative EV sales within the United States. Since Tesla rarely breaks out its unit sales geographically, it's very difficult for public investors and consumers to forecast when it will hit that point. The most recent shareholder letter gave a rare glimpse, while touting how the Model S dominated the large luxury vehicle market last year. Model S sales jumped 51% in the U.S. last year, while all of Tesla's direct competitors in this market segment saw sales fall.
In the process, Tesla disclosed that it sold nearly 42,000 electric cars in 2014 and 2015 combined. It's very difficult to guess when Tesla will hit the 200,000 threshold that triggers the phaseout. Most analysts think it will be 2018. But that has some potentially large implications for customers that might be factoring in the tax credit to their purchase decision, since that would bring the starting price down to $27,500. If the Model 3 generates blowout demand that takes a long time to fulfill, customers might see that tax credit hang in the balance as they wait.
Considering the production prioritization, there's a bit of a trade-off. Ordering a highly optioned model will cost more but will likely be delivered sooner and have better odds of qualifying for the full federal tax credit.
How the federal tax credit works
On top of all that, there's also some important details about how the federal tax credit actually works. The $7,500 credit can only be applied if the customer has a tax liability of $7,500 or more, and any unused portion is not refundable and can not be carried forward. That means if you only have a tax liability of $5,000 for the year you take delivery, then the remaining $2,500 disappears unused.
Up until now, Tesla customers who buy a Model S or Model X are generally higher-income individuals, so they generally have no problem claiming the full credit. But since Model 3 is targeting the mass market, it becomes quite important. An individual making less than $50,000 may not have a tax liability of $7,500 or more and therefore may not be eligible for the full credit. Of course, everyone's tax situation is different and there are a lot of variables, so you should consult your own tax advisor for detailed specifics.
Evan Niu, CFA owns shares of Tesla Motors. The Motley Fool owns shares of and recommends Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.