Understanding Corporate Income Tax Reporting: Tesla’s Electrifying Ride to Profitability

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.

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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.

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