Tesla is one of the most valuable companies in the world, and it has retained its trillion-dollar status since 2021. It is also one of the largest manufacturers of electric vehicles and lithium-ion batteries or energy storage systems. Most of the fortune of Elon Musk is also tied to its stock performance. The stock price of the company has traded from below USD 30.00 in 2019 to above USD 200.00 starting in 2021. However, despite these accomplishments, its annual financial statements have indicated that it has recently been paying very minimal to zero income taxes to the United States state and federal governments. The company has maintained that its favorable tax position is based on so-called legal tax avoidance strategies that have become integral components of its specific financial strategy and general business strategy.
Maximizing Shareholder Value and Taking Advantage of Relevant Options: The Key Tax Avoidance Strategies of Tesla
A brief published by the Institute on Taxation and Economic Policy reported that Tesla paid zero federal income tax in 2024 despite earning USD 2.3 billion in U.S. sales alone. It also showed that the company paid zero federal tax in 2022 and only USD 48 million in 2023. The total income of Tesla from 2022 to 2023 was close to USD 11 billion. The aforesaid were not the only years it paid minimal to zero in income tax. Its 2021 annual report indicated that paid USD 9 million in state tax and zero in federal tax.
The favorable tax position of Tesla has been met with stark criticisms. These also reflect what critics consider systemic flaws in the U.S. tax system and negative perceptions toward existing tax laws and specific corporate tax laws. Senator Elizabeth Warren has called for legislative action to address these issues. However, in its defense, the company has repeatedly explained and noted that its tax avoidance strategies are within the bounds of law. The following are the specific tax avoidance strategies of Tesla:
1. Accelerated Depreciation
Note that certain assets depreciate over time. When a business buys an asset, like a piece of machinery or a vehicle, it loses value over time because of wear and tear, obsolescence, and other factors. Depreciation is a tax deduction. There is also a specific workaround for businesses to deduct the cost of an asset over time for tax purposes. It is called accelerated depreciation. This allows businesses to take larger deductions in the early years of the life of a particular asset or group of assets before making smaller deductions later on.
Most businesses in the United States use the Modified Accelerated Cost Recovery System or MACS. This allows them to recover investments in tangible property through faster depreciation deductions. The results are higher deductions in the initial years of an asset and reduced taxable income during those periods. This approach is outlined in the Internal Revenue Code Section 168. Section 179 also allows businesses to deduct the full purchase price of qualifying equipment or software in the year of purchase, subject to certain limits.
The report from ITEP and an examination of financial statements revealed that Tesla has been using accelerated depreciation as one of its tax avoidance strategies. Reports in 2024 indicated that this approach resulted in approximately USD 500 million in tax savings for the company. Tesla has high capital expenditures because it owns and operates manufacturing facilities. Its most common depreciating assets are equipment used in research, production, and operations. The superchargers are also considered depreciating assets.
2. Stock-Based Compensation Deductions
Another tax avoidance strategy of Tesla is the so-called stock-based compensation deduction. The company has been giving its key employees shares of its stock as part of their compensation package and in relation to their performance. This scheme has also allowed it to claim deductions based on the value of these shares. This particular strategy has enabled Tesla to save about USD 500 million in tax liabilities for 2024. Other large companies like Meta Platforms have also utilized this particular tax avoidance strategy.
Companies often compensate employees, particularly executives, with stock options. This involves giving them a specified amount of shares. Nevertheless, for tax purposes, businesses can claim a deduction equal to the difference between the market price and the exercise price of the stock options when employees exercise them. This can lead to substantial tax deductions. The amount of deductions becomes more substantial and results in higher tax savings if the stock price of the company has appreciated significantly.
The specific legal basis for stock-based compensation deductions can be traced to Section 8 of the Internal Revenue Code. This section governs the tax treatment of property transferred in connection with the performance of services and outlines when the employee recognizes income and when the employer can take a deduction. Sections 421 and 422 also deal with specific types of stock options. These include incentive stock options and employee stock purchase plans. Both have different tax rules than regular stock options.
3. Particular U.S. Tax Incentives
It is worth noting that the federal and state governments of the U.S. provide various categories of tax incentives to incentivize specific business behaviors and investments. This promotes activities and growth in specific sectors or markets. Examples include research and development in the tech sector and renewable energy in the energy sector. The tech sector and specific industries involved in tech have been provided with a range of incentives in the form of tax credits. These include allowable deductions in sales tax and property tax.
The electric vehicle industry in the U.S. has also been incentivized under different laws. These include the Inflation Reduction Act of 2022 provides incentives for the domestic manufacturing of batteries, critical minerals, and other components crucial for EV production. Sections 30D or the Clean Vehicle Credit and 25E or the Owned Clean Vehicle Credit of the Internal Revenue Code give individuals and businesses tax credits for purchasing qualified electric vehicles. These credits are intended for consumers but benefit producers.
Nevertheless, for Tesla, the company has received numerous tax incentives. These have helped in reducing its tax obligations. It saved USD 300 million in unspecified federal tax credits in 2024. The company has also received massive state-level tax incentives. Note that Nevada offered a USD 1.2 billion tax incentive package. This includes sales and property tax breaks. The deal was meant to encourage Tesla to construct and operate one of its Gigafactory for lithium-ion batteries and electric vehicle components in the state.
4. Net Operating Loss Carryforwards
A particular company incurs net operating loss when its tax-deductible expenses exceed its taxable income. Startups with high capital and operational expenditures often experience these losses in the initial years of their operations. This has been seen in a lot of tech startups with manufacturing capabilities. The upside is that these losses can be carried forward in the future to reduce future tax liabilities. Specifically, once a particular company enters its profitable years, it can use its previous net operating losses to reduce its income tax.
The aforementioned approach is called net operating loss or NOL carryforwards. It is popular across U.S. companies. Section 172 of the Internal Revenue Code governs this particular tax avoidance strategy. Furthermore, following the passage Tax Cuts and Jobs Act of 2017, the rules were modified. The net operating losses arising after 31 December 2017 can be carried forward forever. However, as part of its moderating and balancing provision, the deductions are limited to 80 percent of taxable income for each subsequent year.
Sendil Palani, the Vice President of Finance of Tesla, explained in a post on the social media platform X, formerly known as Twitter, that the favorable tax position of his company is a result of billions of losses incurred during its early years. An examination of its 2022 annual report revealed that it had USD 18 billion in federal and 14 billion in state net NOL carryforwards available to offset future taxable income. Part of the reason it paid zero in federal income tax was its USD 13.7 billion federal NOL carryforward.
5. Overseas Profit Allocation
Tesla reported that a significant portion of its profits originated from overseas operations. The tax rates in these countries may be lower. For example, in 2021, despite 45 percent of its revenues coming from the United States, it reported a USD 130 million loss in its U.S. operations and attributed all of its USD 6 billion pre-tax profit to overseas operations. Tesla uses transfer pricing to set prices for transactions between its subsidiaries in different countries and also takes advantage of tax incentives and credits offered by various countries.
Note that the aforementioned tax avoidance strategy is available to multinational corporations or businesses with internationalized operations. These companies often have subsidiaries or related entities in different countries. These are engaged in internal transactions like selling goods, providing services, or licensing intellectual property. The price charges for these intercompany transactions are called transfer prices. Nevertheless, by setting transfer prices, a company can shift profits from a high-tax country to a low-tax country.
Section 482 of the Internal Revenue Code provides guidelines for transfer pricing. It specifically requires transactions between related parties to be priced as if they were between independent entities. This is called the arm’s length principle. It is enshrined in tax treaties and domestic laws. The Organization for Economic Cooperation and Development or OECD has issued guidelines on transfer pricing to help tax authorities evaluate whether transactions between related entities are conducted based on this governing principle.
FURTHER READINGS AND REFERENCES
- Duhoon, A. and Singh, M. 2023. “Corporate Tax Avoidance: A Systematic Literature Review and Future Research Directions. In LBS Journal of Management & Research. 21(2): 197-217. Emerald. DOI: 1108/lbsjmr-12-2022-0082
- Gardner, M. 30 January 2025. “Tesla Reported Zero Federal Income Tax on $2 Billion of U.S. Income in 2024.” Institute on Taxation and Economic Policy. Available online
- Isidore, C. 10 February 2022. “Elon Musk’s US Tax Bill: $11 Billion. Tesla’s: 0. CNN. Available online
- Martinez, I. 2025. “Tesla Paid Zero Federal Income Tax on USD 2 Billion Income in 2024.” Konsyse. Available online
- Palani, S. 10 February 2025. “Post.” X. Available online
- Schwarz, P. 2009. Tax‐Avoidance Strategies of American Multinationals: An Empirical Analysis. In Managerial and Decision Economics. 30(8): 539-549. Wiley. DOI: 1002/mde.1471
- Thomsen, M. and Watrin, C. 2018. “Tax Avoidance Over Time: A Comparison of European and U.S. Firms. In Journal of International Accounting, Auditing and Taxation. 33(40-63). Elsevier BV. DOI: 1016/j.intaccaudtax.2018.11.002