Case
Teaching Notes
Supplementary Resources
Abstract
Tesla Inc. is a U.S.-incorporated multinational company run by Elon Musk, which designs, manufactures, and sells electric cars. Since its founding, Tesla has challenged industry norms and first gained widespread attention with production of the high-performance Tesla Roadster, the first fully electric sports car, following this vehicle with its Model S, Model X and, most recently, the Model 3, a car targeted for mass markets. Tesla’s change and innovation has come at a cost; despite its growth, Tesla has never earned an annual profit and has an accumulated deficit of USD 5.4 billion as of December 31, 2020. However, as of their 2020 fiscal year end Tesla has achieved positive net income for six consecutive quarters. This case offers an opportunity to understand the terms and components of corporate income tax reporting with a specific focus on the tax consequences of loss-generating companies and a chance to explore the future tax implications as a company shifts towards profitability.
Case
Learning Outcomes
Students should have an improved understanding of the following:
- The accounts, terminology, and components of income tax reporting as well as how these impact financial statements, including deferred tax assets (DTAs), deferred tax liabilities (DTLs), net operating loss (NOL) carry-forwards and valuation allowances.
- How to understand a rate reconciliation table in order to explain why a company’s effective tax rate differs from the statutory rate and use this understanding to consider the persistence of the reconciling items and the company-specific factors when predicting or using a tax rate to determine discount rates, forecast future performance, or create valuation models.
- The guidelines of ASC 740 (Accounting for Income Taxes), including the choices and discretion that exist for income tax reporting.
- How to understand Tesla’s current tax situation and how it relates to and is or will be affected by past, current, and future performance and profitability.
- The relation between accounting information and choices and the market’s assessment of value.
Introduction and Background
Tesla, Inc. is a U.S. automotive company founded by Martin Eberhard, Marc Tarpenning, and its current CEO, Elon Musk. Tesla designs, manufactures, and sells electric cars and first gained widespread attention following production of the high-performance Tesla Roadster, the first fully electric sports car. Tesla’s flagship luxury sedan, the Model S, was the world’s best-selling plug-in electric vehicle in 2015 (Cobb, 2016). Tesla introduced its third model, the Model X, a luxury SUV, in 2015. CEO Elon Musk has also consistently discussed plans to ramp up volume and bring down prices to target a broader market. Consistent with these plans, in March 2016, Tesla unveiled its plans for the Model 3, a car targeted for mass markets, which starts at USD 35,000; the company received over 325,000 Model 3 reservations within a week (Hull, 2016). Tesla also sells electric vehicle powertrain components and lithium ion battery products to individuals and various entities and has pursued an array of other opportunities.
In addition to its movement away from the traditional internal combustion engine, in an effort to offer a more economically efficient means of purchasing a car, Tesla is currently the only car manufacturer that sells new cars directly to its U.S. customers. Tesla does not use the traditional dealership/middleman model and even moved to all online sales in 2019.
These innovations have come at a price. While Tesla had sold and delivered over 1 million vehicles by the end of the second quarter of 2020 and delivered nearly 500,000 vehicles in 2020, during the past years the company has faced a series of delays, is still in the midst of major expansion efforts, and the 2020 balance sheet reported a total accumulated deficit of USD 5.4 billion. In contrast to these historic losses, in the 2015 fiscal year-end conference call, Elon Musk noted that “we anticipate it being profitable by GAAP’s numbers in Q4 of [2016]” and made a similar comment again when discussing the fiscal year 2019. Somewhat consistent with these predictions, Tesla has achieved positive net income for the six consecutive quarters and turned an annual profit for the first time for the fiscal year ending December 31, 2020.
Despite the long history of losses, the market has offered a healthy valuation of Tesla, pricing it above USD 700 a share (after the 5-for-1 stock split in late August 2020) for a market capitalization of over USD 600 billion (Data 1). This market cap is roughly three times the value of Toyota, which sold over 10 million vehicles in 2019 alone, and at the time was more than the combined market caps of Ford, General Motors, Fiat Chrysler, Daimler Motors, Ferrari, BMW, Honda, and Volkswagen.
Data 1. Stock Daily High of Tesla Inc.
An Introduction to Deferred Taxes and Effective Tax Rates
Deferred taxes can be deferred tax assets (DTAs) or deferred tax liabilities (DTLs). In general, they are calculated by taking into account financial reporting standards for generally accepted accounting principles (GAAP; called “book”) income and comparing this to the taxing authority’s rules for taxable income (e.g., IRS rules). 1 More specifically, deferred taxes are considered temporary differences that arise when a company’s compliance with the taxing authority rules enables the recognition of income or expense deductions at different times or amounts than that which is recognized under financial accounting standards. A DTL is associated with an expected increase in future tax payments; the liability represents the future obligation to pay more taxes at a future date. Conversely, a DTA is associated with an expected decrease in future tax payments; the asset represents the expected benefit of being able to pay less taxes at a future date.
A common example of a DTL arises from the accelerated depreciation that is allowed for tax purposes following the IRS code. The accelerated depreciation rules for tax purposes allow larger (at times, full) depreciation deductions in the early years of the asset’s useful life than is recognized for GAAP (or book) purposes. As a result, the company will have smaller deductions and more to pay in taxes in the later years of the asset’s life. Tesla records USD 1.185 billion and USD 1.488 billion for its depreciation DTL in fiscal years 2019 and 2020, respectively. This means that as of these dates, Tesla has recognized more depreciation for tax purposes, which allows accelerated depreciation, than it has recognized for book purposes, for which is uses straight-line depreciation (straight-line depreciation for book purposes is consistent with other companies/manufacturers).
A common example of a DTA arises from the fact that for tax purposes companies are allowed to carry past losses forward against future taxable income and therefore losses can offset taxable income in profitable years. This is referred to as the net operating loss (NOL) carry-forward. Tesla records NOL carry-forward DTAs of USD 1.846 billion and USD 2.172 billion in 2019 and 2020, respectively. This means that as of these dates, Tesla has net losses noted from an income tax perspective and can use these losses to offset future taxable income, if any.
The following is an example of how we calculate a DTL:
Assume we buy a USD 100 asset on January 1, Year 1 and it has a five-year useful life and no residual value. Using the common straight-line method of depreciation for GAAP (or book) purposes, we would have USD 100/5 years = USD 20 of depreciation expense each year. However, following the accelerated tax depreciation rules, a company can deduct USD 38 of depreciation for tax purposes. In this case we have an extra USD 18 of deductions for tax purposes compared to book purposes in Year 1, and therefore have USD 18 less of income that we have to pay taxes on. However, this also means that for tax purposes we only have USD 62 left of depreciation expense to deduct in future years, while we have USD 80 left to deduct for book purposes. Similarly, with USD 18 less of income that we paid taxes on in Year 1, we also have USD 18 more of income that we have to pay taxes on in future years. Therefore, at the end of Year 1 we record a liability of USD 18 multiplied by our tax rate of 21% = USD 3.78 DTL to represent the expected tax payment in future years. Table 1 shows how this example works out across time.
Table 1. Deferred Tax Liability Illustration With Depreciation (USD) | |||||||
---|---|---|---|---|---|---|---|
Asset purchase price: 100 Useful life: 5 years Tax rate: 21% | |||||||
| Beginning | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Total |
Value for U.S. GAAP | 100.00 | 80.00 | 60.00 | 40.00 | 20.00 | _ | |
GAAP Depreciation | - | 20.00 | 20.00 | 20.00 | 20.00 | 20.00 | 100.00 |
Value for taxes | 100.00 | 62.00 | 37.20 | 17.20 | _ | _ | |
Tax depreciationa | _ | 38.00 | 24.80 | 20.80 | 17.20 | _ | 100.00 |
Book-tax difference | _ | 18.00 | 22.80 | 22.80 | 20.00 | _ | |
Deferred tax liability | - | 3.78 | 4.79 | 4.79 | 4.20 | _ |
aAmounts determined using double-declining balance to approximate MACRS and assuming the asset was placed into use at the beginning of the first year and mid-month convention was used (with rounding).
The following is an example of how we calculate a DTA:
Assume we lose USD 100 of pre-tax income in our first year of operations, we only have federal taxes to consider at a rate of 21% and can ignore valuation allowances. We do not owe any taxes this year as we’ve lost money. However, we don’t get any tax benefit this year either (we cannot pay less than USD 0 of taxes). Here we can recognize a benefit associated with the opportunity to use this NOL to offset future taxes. This benefit is a DTA: 21% × USD 100 NOL= USD 21 NOL DTA. Note that the NOL is USD 100, but the DTA (the future benefit) is not the NOL itself, but the effective future tax savings of USD 21 (the DTA is the NOL × the tax rate)
For completeness, assume in our second year we make USD 300 of pre-tax income. Without anything else, our tax would be USD 300 × 21% = USD 63. However, given the prior year’s loss we can use the prior USD 100 NOL to offset USD 100 of income in the second year, leaving us to only have USD 200 of pre-tax income and thus we only owe USD 42 of taxes. Here the USD 21 DTA created in the first year represents USD 21 of savings in the second year.
For Tesla, they note USD 9.65 billion of federal NOLs and USD 6.6 billion of state NOLs as of December 31, 2020 in their footnote and disclose USD 2.172 billion of DTAs associated with these NOLs in the Deferred Tax Table. USD 9.65 × 21% = USD 2.027 billion of DTAs associated with the federal NOLs. Moreover, USD 6.6 × 4% = USD 264 million of DTAs associated with the state NOLs and USD 2.027 billion + USD 264 million = USD 2.291 billion, which roughly ties out to the USD 2.172 billion of DTAs associated with these NOLs in the Deferred Tax Table. Importantly, these do not have to perfectly tie out as we estimated the 4% state tax 2 and other aspects may apply or offset these as well.
Valuation Allowances
Turning our attention back to DTAs, to recognize any asset future benefits must be probable. As assets, DTAs can only be recognized when the company expects that they will be able to actually reap the future benefit. When a company does not expect to benefit from a DTA they must set up a valuation allowance. When determining whether the benefit is expected, the financial reporting rules for valuation allowances focus on a more-likely-than-not threshold, which is a greater than 50% chance. Specifically, the applicable part of U.S. GAAP (ASC 740-10-25-6) requires that if the ability to benefit is not greater than 50%, the company records a valuation allowance which offsets the balance of a DTA (i.e., there is no net asset value for the potential DTA). For example, if a company had reason to believe there was less than a 50% probability of benefitting from a specific DTA of USD 200, the DTA would be offset by a valuation allowance of USD 200, bringing the net amount to USD 0. Under U.S. GAAP there is no opportunity for partial valuation allowances of specific DTAs; for example, if there was a 90% probability of benefitting from this specific USD 200 DTA, a company would not record any valuation allowance, and if the probability of benefitting was only 20%, a company would still need to set up a valuation allowance to offset the entire USD 200 DTA amount.
Effective Tax Rates
The effective tax rate (ETR) is the average rate at which a company’s income before taxes is taxed and is calculated as a company’s total tax expense in a period divided by its income before taxes. Permanent differences, such as tax credits or income earned in jurisdictions with different rates than the United States, cause a company’s ETR to differ from the statutory rate (which is 21% for corporate income in the United States following the Tax Cuts and Jobs Act (TCJA) passed at the end of 2017). While deferred taxes impact the timing of tax payments, as temporary differences they do not impact a company’s ETR, except when a valuation allowance is created or reversed. In effect, a valuation allowance makes the deferred tax difference seemingly permanent: a company creates a valuation allowance when it believes it is more likely than not it will never have sufficient future profitability to benefit from the DTA, and reverses a valuation allowance when it believes it is now more likely than not that it will have sufficient future profitability to benefit from the DTA.
Rate Reconciliations
As a part of the tax footnote, companies report a rate reconciliation (“rate rec”), which reconciles a company’s ETR to the statutory rate by showing the items that cause the ETR to differ from the statutory rate. The rate reconciliation can be presented in terms of rates (reconciling to the corporate statutory rate of 21%) or as dollar amounts (as Tesla does in its income tax footnote). The rate reconciliation can be useful to analysts or other outsiders using financial statements as they can assess the expected sustainability or persistence of the items that caused a company’s ETR to differ from the statutory rate. Assessing the persistence of an ETR is useful as it can assist in the determination of an expected company-specific tax rate, which can be used in various calculations, such as company-specific discount rates, forecasts, and valuation models. Importantly, many companies do not recognize tax expense or pay taxes at the statutory rate, so it is important to understand each company’s ETR.
Permanent Versus Temporary Differences
Here is one more way of looking at permanent and temporary differences. The general logic is the same as the other concepts of accrual accounting: represent the business conducted and help predict future cash flows.
A permanent difference affects the tax rate as it provides a situation in which the company will permanently save on (or pay more) taxes. These affect the rate as they have a permanent effect on cash flows, not just a timing difference. If something permanently drops our rate from 35% to 28% or 21%, we record tax expense at this lower rate. (Permanent does not mean there could never be another legislative change to the tax code; rather it implies that the rate from this code is set. These rates do change, but not that often; before the TCJA in 2017 the corporate rate had been 35% since 1993.)
A temporary difference is a situation in which the company will only temporarily save on (or pay more) taxes. These do not affect the rate as they only have a temporary effect on cash flows. We continue to record income tax expense as the difference is in timing and we will eventually have to pay the income taxes. Although income taxes are expenses, this is the same idea we use in accrual accounting with revenue—we recognize revenue for sales on account as although we did not collect the cash today, we expect to, so the difference is only in timing.
Notes
1. DTAs and DTLs are technically determined by comparing the book and tax basis of the underlying assets or liabilities. However, as it is likely more intuitive, this case illustrates how DTAs and DTLs work with differences in book and tax income. The takeaways are the same, except for an aspiring tax professional. In addition, DTAs and DTLs are determined on a taxing jurisdiction basis, so a company’s DTAs and DTLs relate to the specific jurisdictions in which it operates.
2. To get this exactly right, we would need the amount of income they earned in each state, which is not disclosed, as well as the income tax rates for each state and any other information. This won’t materially change what we have walked through here.
Discussion Questions
Familiarize yourself with the introduction to corporate income tax reporting, Tesla’s historical financial performance, and Tesla’s income tax footnotes in the Supplementary Resources section to answer the questions in this case.
Preparatory Questions
- Examine Tesla’s income statements (Appendix 1, Table 2) and briefly consider where Tesla is doing well, where it is struggling, and the drivers of its performance.
- Generally speaking, consider what we would expect to happen to a company’s operating income as a percentage of revenue in light of sales growth at the rate we see here.
Required Questions
- Examine Tesla’s income statements and balance sheets (Appendix 1, Tables 2 and 3) with specific focus on loss before income taxes and the provision for income taxes.
- Considering a general understanding of net operating loss (NOL) carry-forwards, discuss what you would generally expect to see in the provision for income taxes when a company loses money. Provide support by offering the reasons why you formed such an expectation.
- Discuss whether and how your expectation differs from what Tesla is reporting for its provision for income taxes.
- Moving into the income tax footnotes (Appendix 2), examine both the deferred tax and effective rate reconciliation disclosures.
- Briefly discuss what Tesla has done with nearly all of its deferred tax assets (DTAs) and provide the general reason the company notes for its treatment of DTAs.
- Using the rate reconciliation disclosure, discuss how the company’s choice with DTAs affects its effective tax rate (ETR).
- Assume you are working in a professional capacity as an auditor overseeing the preparation of Tesla’s 2020 10-K. Discuss whether you believe its reporting choice for DTAs is aggressive or conservative and provide the basis for your conclusion.
- Setting the rules of U.S. GAAP and general compliance aside, assume you are now working in a professional capacity as an analyst or investor whose goal is to evaluate Tesla’s 2019 provision for income taxes in a manner that best represents the underlying economics of Tesla. Discuss what you would report on this line and the reason for your choice.
- CEO Elon Musk has asserted that Tesla will be profitable on a GAAP basis at different times and the company has achieved positive net income for the six consecutive quarters ending December 31, 2020. Assume Tesla is increasingly profitable from 2021 through 2024, as noted in Appendix 3 (earning up to a few billion dollars of operating income a year) and the following simplifying assumptions: Tesla earns all of its income in the United States; state taxes are 0%; Tesla does not qualify for any tax credits; the U.S. corporate statutory rate remains at 21%; any amount of interest expense over the next five years is offset by an equivalent amount of interest income.
- In light of the information presented in this case and the future profitability noted in Table 6, present an estimate of the total taxes paid by Tesla for U.S. income tax for 2021–2024 and the reason for your amount.
- Discuss whether and how Tesla’s ETR will differ when comparing the past five years (2015–2020), the next four years (2021–2024), and the long term (assuming future profitability as noted in Appendix 3), and provide the reason for your choice.
- Why do your answers to these case questions differ from or are consistent with Tesla’s current market value and investors’ expectations of its future performance?
Further Reading
References
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Resources
Appendix 1: Financial Statements From Tesla’s 2014–2020 10-Ks (with some adjustments)
Table 2. Tesla’s Income Statements 2014–2020 (In millions USD, fiscal year ending Dec 31) | |||||||
---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
Total revenues | 3,198 | 4,046 | 7,000 | 11,759 | 21,461 | 24,578 | 31,536 |
Total cost of revenues | 2,317 | 3,123 | 5,401 | 9,536 | 17,411 | 20,509 | 24,906 |
Gross profit | 332 | 924 | 1,599 | 2,222 | 4,042 | 4,069 | 6,630 |
Research and development | 465 | 718 | 834 | 1,373 | 1,460 | 1,343 | 1,491 |
Selling, general and administrative | 604 | 922 | 1,432 | 2,477 | 2,835 | 2,646 | 3,145 |
Restructuring and other | - | 135 | 149 | 0 | |||
Total operating expenses | 1,068 | 1,640 | 2,267 | 3,355 | 4,430 | 4,133 | 4,636 |
Income (loss) from operations | (187) | (717) | (667) | (1,632) | (333) | (69) | 1,994 |
Interest income | 1 | 2 | 9 | 20 | 24 | 44 | 30 |
Interest expense | (101) | (119) | (199) | (471) | (663) | (635) | (748) |
Other income (expense), net | 2 | (42) | 111 | (125) | 22 | 45 | (122) |
Income (loss) before income taxes | (285) | (875) | (746) | (2,209) | (1,005) | (665) | 1,154 |
Provision for income taxes | 9 | 13 | 27 | 32 | 53 | 110 | 292 |
Net income (loss) | (294) | (889) | (773) | (2,241) | (1,063) | (775) | 862 |
Table 3. Tesla’s Balance Sheets 2014–2020 (In millions USD, as of the fiscal year ending Dec 31) | |||||||
---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
Cash and cash equivalents | 1,906 | 1,197 | 3,393 | 3,368 | 3,686 | 6,268 | 19,384 |
Restricted cash and marketable securities | 18 | 23 | 106 | 155 | 919 | 246 | - |
Accounts receivable | 227 | 169 | 499 | 515 | 949 | 1,324 | 1,886 |
Inventory | 954 | 1,278 | 2,067 | 2,264 | 3,113 | 3,552 | 4,101 |
Prepaid expenses and other current assets | 95 | 116 | 194 | 268 | 366 | 713 | 1,346 |
SolarCity operating lease, net | - | - | 5,920 | 10,464 | 8,361 | 8,585 | 5,979 |
Total current assets | 3,199 | 2,782 | 12,180 | 17,035 | 16,668 | 20,688 | 32,696 |
Operating lease vehicles, net | 767 | 1,791 | 3,134 | - | 3,091 | ||
Property, plant and equipment, net | 1,829 | 3,403 | 5,983 | 10,028 | 11,330 | 10,396 | 12,747 |
Operating lease right-of-use assets | - | - | - | - | 1,218 | 1,558 | |
Intangible assets, net | - | 13 | 376 | 362 | 282 | 339 | 313 |
Goodwill | - | - | - | 60 | 68 | 198 | 207 |
MyPower customer notes receivable, net of current portion | - | - | 506 | 457 | 422 | 393 | - |
Restricted cash | 11 | 32 | 268 | 442 | 398 | 269 | - |
Other assets | 43 | 47 | 217 | 273 | 572 | 808 | 1,536 |
Total assets | 5,849 | 8,068 | 22,664 | 28,655 | 29,740 | 34,309 | 52,148 |
Accounts payable | 778 | 916 | 1,860 | 2,390 | 3,405 | 3,771 | 6,051 |
Accrued liabilities and other | 269 | 423 | 1,210 | 1,731 | 2,094 | 2,905 | 3,855 |
Deferred revenue | 192 | 424 | 763 | 1,015 | 630 | 1,163 | 1,458 |
Resale value guarantees | - | 137 | 180 | 787 | 503 | 317 | - |
Customer deposits | 258 | 283 | 664 | 854 | 793 | 726 | 752 |
Current portion of long-term debt and capital leases | 611 | 628 | 984 | 797 | 2,568 | 1,785 | 2,132 |
Current portion of solar bonds issued to related parties | - | 166 | 100 | - | - | - | |
Total current liabilities | 2,107 | 2,811 | 5,827 | 7,675 | 9,993 | 10,667 | 14,248 |
Deferred revenue, less current portion | 292 | 446 | 852 | 1,178 | 991 | 1,207 | 1,284 |
Convertible debt, less current portion | - | - | - | - | - | - | - |
Resale value guarantee | 488 | 1,294 | 2,210 | 2,309 | 329 | 36 | - |
Long-term debt and capital leases, net of current portion | 1,819 | 2,021 | 5,860 | 9,416 | 9,404 | 11,634 | 9,556 |
Solar bonds issued to related parties, net of current portion | - | - | 99 | - | - | - | - |
Convertible senior notes issued to related parties | - | - | 10 | 3 | - | - | - |
Other long-term liabilities | 173 | 365 6,937 | 1,891 | 2,443 | 2,710 | 2,655 | 3,330 |
Total liabilities | 4,879 | 16,750 | 23,023 | 23,427 | 26,199 | 28,418 | |
Redeemable noncontrolling interests in subsidiaries | - | - | 367 | 398 | 556 | 643 | 604 |
Convertible senior notes | 58 | 42 | 9 | - | - | - | 51 |
Stockholders’ equity | |||||||
Common stock | - | - | - | - | - | - | - |
Additional paid-in capital | 2,345 | 3,415 | 7,774 | 9,178 | 10,249 | 12,737 | 27,261 |
AOCI | - | (4) | (24) | 33 | (8) | (36) | 363 |
Accumulated deficit | (1,434) | (2,322) | (2,997) | (4,974) | (5,318) | (6,083) | (5,399) |
Total stockholders’ equity | 970 | 1,131 | 5,129 | 4,635 | 5,479 | 7,261 | 22,880 |
Noncontrolling interests in subsidiaries | - | - | 785 | 997 | 834 | 849 | 850 |
Total liabilities and stockholders’ equity | 5,849 | 8,068 | 22,664 | 28,655 | 29,740 | 34,309 | 52,148 |
Appendix 2: Excerpts From Tesla’s Income Tax Footnotes in Its 2020 10-K
Table 4. Tesla’s Deferred Tax Footnote From FYs 2018–2020 (USD) | |||
---|---|---|---|
| December 31, 2018 | December 31, 2019 | December 31, 2020 |
Deferred tax assets: | |||
Net operating loss carry-forwards | 1,760 | 1,860 | 2,172 |
Research and development credits | 377 | 486 | 624 |
Other tax credits | 128 | 126 | 168 |
Deferred revenue | 156 | 301 | 450 |
Inventory and warranty reserves | 165 | 243 | 315 |
Stock-based compensation | 102 | 102 | 98 |
Operating lease right-of-use liabilities | - | 290 | 335 |
Accruals and others | 28 | 16 | 205 |
Total deferred tax assets | 2,716 | 3,410 | 4,948 |
Valuation allowance | (1,806) | (1,956) | (2,930) |
Deferred tax assets, net of valuation allowance | 910 | 1,454 | 2,018 |
Deferred tax liabilities: | |||
Depreciation and amortization | (861) | (1,185) | (1,488) |
Investment in certain financing funds | (33) | (17) | (198) |
Operating lease right-of-use assets | _ | (263) | (305) |
Deferred Revenue | - | - | (50) |
Other | (24) | (24) | (61) |
Total deferred tax liabilities | (918) | (1,489) | (2,102) |
Deferred tax liabilities, net of valuation allowance and deferred tax assets | (8) | (35) | (84) |
Table 5. Tesla’s Rate Reconciliation Table for FYs 2018–2020 (In millions USD, fiscal year ended December 31) | |||
---|---|---|---|
2018 | 2019 | 2020 | |
Tax at statutory federal rate | (211) | (139) | (242) |
State tax net of federal benefit | 3 | 5 | 4 |
Nondeductible executive compensation | 39 | 62 | 184 |
Other nondeductible expenses | 26 | 32 | 52 |
Excess tax benefits related to stock-based compensation | (44) | (7) | (666) |
Foreign income rate differential | 161 | 189 | 33 |
U.S. tax credits | (80) | (107) | (181) |
Noncontrolling interests and redeemable noncontrolling interests adjustment | 32 | (29) | 5 |
GILTI Inclusion | - | - | 133 |
Convertible debt | - | (4) | |
Unrecognized tax benefits | 1 | 17 | 1 |
Change in valuation allowance | 131 | 91 | 485 |
Provision for income taxes | 58 | 110 | 292 |
Income Tax Footnote Disclosures
From the 2020 10-K form:
As of December 31, 2020, we recorded a valuation allowance of $2.93 billion for the portion of the deferred tax asset that we do not expect to be realized. The valuation allowance on our net deferred taxes increased by $974 million, increased by $150 million, and decreased by $38 million during the years ended December 31, 2020, 2019 and 2018, respectively. The changes in valuation allowance are primarily due to additional U.S. deferred tax assets and liabilities incurred in the respective year. We have net $260 million of deferred tax assets in foreign jurisdictions, which management believes are more-likely-than-not to be fully realized given the expectation of future earnings in these jurisdictions. We did not have material release of valuation allowance for the years ended December 31, 2020, 2019 and 2018. We continue to monitor the realizability of the U.S. deferred tax assets taking into account multiple factors, including the results of operations and magnitude of excess tax deductions for stock-based compensation. We intend to continue maintaining a full valuation allowance on our U.S. deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Given the improvement in our operating results and depending on the amount of stock-based compensation tax deduction available in the future, we may release the valuation allowance associated with the U.S. deferred tax assets in the next few years. Release of all, or a portion, of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded.
As of December 31, 2020, we had $9.65 billion of federal and $6.60 billion of state net operating loss carry-forwards available to offset future taxable income, which will not begin to significantly expire until 2024 for federal and 2031 for state purposes. A portion of these losses were generated by SolarCity and some of the companies we acquired, and therefore are subject to change of control provisions, which limit the amount of acquired tax attributes that can be utilized in a given tax year. We do not expect these change of control limitations to significantly impact our ability to utilize these attributes.
As of December 31, 2020, we had research and development tax credits of $417 million and $373 million for federal and state income tax purposes, respectively. If not utilized, the federal research and development tax credits will expire in various amounts beginning in 2024. However, the state of California research and development tax credits can be carried forward indefinitely. In addition, we have other general business tax credits of $167 million for federal income tax purposes, which will not begin to significantly expire until 2033.
Federal and state laws can impose substantial restrictions on the utilization of net operating loss and tax credit carry-forwards in the event of an “ownership change,” as defined in Section 382 of the Internal Revenue Code. We have determined that no significant limitation would be placed on the utilization of our net operating loss and tax credit carry-forwards due to prior ownership changes.
The local government of Shanghai granted a beneficial corporate income tax rate of 15% to certain eligible enterprises, compared to the 25% statutory corporate income tax rate in China. Our Gigafactory Shanghai subsidiary was granted this beneficial income tax rate of 15% for 2019 through 2023.
No deferred tax liabilities for foreign withholding taxes have been recorded relating to the earnings of our foreign subsidiaries since all such earnings are intended to be indefinitely reinvested. The amount of the unrecognized deferred tax liability associated with these earnings is immaterial.
For historical reference, from the 2019 10-K form:
As of December 31, 2019, we recorded a valuation allowance of USD 1.96 billion for the portion of the deferred tax asset that we do not expect to be realized. The valuation allowance on our net deferred taxes increased by USD 150 million, decreased by USD 38 million, and increased by USD 821 million during the years ended December 31, 2019, 2018, and 2017, respectively. The changes in valuation allowance are primarily due to additional U.S. deferred tax assets and liabilities incurred in the respective year. We have net USD 151 million of deferred tax assets in foreign jurisdictions, which management believes are more-likely-than-not to be fully realized given the expectation of future earnings in these jurisdictions. We continue to monitor the realizability of the U.S. deferred tax assets taking into account multiple factors, including the results of operations and magnitude of excess tax deductions for stock-based compensation. We intend to continue maintaining a full valuation allowance on our U.S. deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. Release of all, or a portion, of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded.
As of December 31, 2019, we had USD 7.51 billion of federal and USD 6.16 billion of state NOL carry-forwards available to offset future taxable income, which will not begin to significantly expire until 2024 for federal and 2028 for state purposes. A portion of these losses were generated by SolarCity prior to our acquisition in 2016 and, therefore, are subject to change of control provisions, which limit the amount of acquired tax attributes that can be utilized in a given tax year. We do not expect these change of control limitations to significantly impact our ability to utilize these attributes.
As of December 31, 2019, we had research and development tax credits of USD 320 million and USD 284 million for federal and state income tax purposes, respectively. If not utilized, the federal research and development tax credits will expire in various amounts beginning in 2024. However, the state research and development tax credits can be carried forward indefinitely. In addition, we have other general business tax credits of USD 125 million for federal income tax purposes, which will not begin to significantly expire until 2033.
No deferred tax liabilities for foreign withholding taxes have been recorded relating to the earnings of our foreign subsidiaries since all such earnings are intended to be indefinitely reinvested. The amount of the unrecognized deferred tax liability associated with these earnings is immaterial.
Federal and state laws can impose substantial restrictions on the utilization of NOL and tax credit carry-forwards in the event of an “ownership change,” as defined in Section 382 of the Internal Revenue Code. We have determined that no significant limitation would be placed on the utilization of our NOL and tax credit carry-forwards due to prior ownership changes.
Appendix 3: Simplified Forecast of Tesla that Assumes Future Profitability
Table 6. Hypothetical Projections of Tesla’s Income From Operation (In millions USD, fiscal year ending Dec 31) | ||||||||
---|---|---|---|---|---|---|---|---|
Revenues | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 |
Income (loss) from operations | 500 | 1,000 | 1,500 | 3,000 | 4,000 | 5,000 | 6,000 | 8,000 |
Income (loss) before income taxes | 500 | 1,000 | 1,500 | 3,000 | 4,000 | 5,000 | 6,000 | 8,000 |
Provision for income taxes | ||||||||
Net income (loss) | ||||||||
Income tax rate |
These forecasted amounts are provided for instructional purposes only and should not be used as part of an investment thesis.