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There is a lot of uncertainty surrounding Tesla Motors Inc (NSDQ:TSLA) today. Will the company be able to produce enough Model 3 sedans to meet investor expectations? Will the merger with SolarCity cause debt payments to become too high? Will General Motors, with the electric Bolt, win the electric vehicle market? Another uncertainty, I would add is how will a Trump Administration effect Tesla's profitability?

In the analysis below, I will discuss how changes in government policy may impact Tesla. I will assume that Tesla and SolarCity will merge and the combined company will have three divisions: Vehicles (Tesla Motors), solar installation (Solar City) and solar panel production.

Tesla Motors

In Tesla's vehicle business, government policies provide two sources of revenue. The first comes from zero emission vehicle (ZEV) credits. The California Air Resources Board (CARB) manages the ZEV program which requires automakers to sell zero emission cars and pick up trucks in California. For each electric vehicle sold, an automaker receive ZEV credits based on auto range.  Tesla receives 3.3 ZEV credits for each Model S while GM receives 1.8 ZEV credits for each Bolt sold.

CARB mandates that each automaker earn a certain amount of ZEV credits per year as a percentage of their sales.  Automakers that don't earn enough ZEV credits can purchase them from other automakers (like Tesla) that earned more than they are required to.

For 2016:

• Q1  $15 million adjusted profit included $68 million ZEV credit sales
• Q2 $26 million adjusted profit included $51 millionZEV credit sales

Tesla is undoubtedly very dependent on ZEV credit sales. The company, however, does not have to worry about any impact from a Trump Administration for ZEV credit sales. The ZEV program is administered and governed by California state and not the federal government. There is likely no policy change the Trump Administration can do to impact the ZEV program.

The second government policy source of revenue for Tesla Motors is the federal electric vehicle tax credit. Buyers of a plug-in or electric vehicle are eligible for a $7,500 federal tax credit until that automaker has sold its 200,000th plug-in in the US. After an automaker has reached 200,000 unit sales, the credit is partially phased out until a complete phase out~12 months later.

Based on historical Tesla sales, the company will not hit its 200,000 limit until Q3 2018 (assuming Model 3 production stays on track). After that, buyers of a Tesla vehicle will receive only a partial credit followed by no credit a year later.

The federal tax credit limit can be changed by the Trump administration. The credit can be abolished immediately or become more stringent. This is a large risk to Tesla since the Model 3 is targeted more towards middle income households versus the higher end Model S, Falcon and Roadster. An immediate cessation or reduction of this credit may lead to depressed Model 3 sales.

SolarCity

Similar to Tesla Motors, SolarCity is dependent upon two sources of revenue created by government policy. The first is net metering. Homes and businesses that install solar systems on their property can sell back excess electricity to their utility company. Net metering reduces the total cost of a solar system by providing a source of revenue to solar customers. Net metering laws are regulated at the municipal and state level and thus are likely not be impacted by change in federal policy.

The second government policy related revenue source is the federal solar tax credit; often referred to as the Investment Tax Credit (ITC). The ITC allows taxpayers (individual or business) to deduct 30% of the cost of installing a solar energy system from their federal taxes and has no cap on its value. As currently legislated, the ITC remains at 30% through 2019. Between 2020 and 2021 the credit begins to drop to 22% and beginning in 2022 is phased out completely for homeowners. Commercial property owners can continue to deduct up to 10% of the cost.

A change in the ITC during the federal budgeting process, whether it be an elimination, a reduction in deduction amount or faster phaseout, will have enormous impact on SolarCity. With SolarCity's Solar Lease program, where homeowners lease a solar system, companies like Google and US Bancorp actually own the systems that SolarCity installs and those companies can claim the tax credit. Google, US Bancorp, etc provide the financing that makes Solar Lease possible. A change in the tax credit may immensely hurt SolarCity's businesses as the Solar Lease program may become too expensive.

Production

Unlike Tesla Motors and SolarCity, Tesla's manufacturing business may actually benefit from a Trump administration. In July 2014, SolarCity agreed to acquire Silevo; a solar panel manufacturer with a factory in Buffalo, NY. Tesla also has the GigaFactory in Nevada and its automotive manufacturing facility in California.

If the Trump administration were to start imposing steep tariffs on imported goods (like solar panels from China or lithium ion batteries from South Korea), Tesla may actually benefit. The solar panels manufactured in Buffalo would likely cost less than imports (as a result of tariffs).

This last section is purely hypothetical. No one knows if a trade war will begin with China or South Korea. If it does, Tesla may actually be a beneficiary.

Conclusion

Tesla thus far has greatly benefited from government programs. The federal electric vehicle tax credit makes Tesla's more affordable; especially import aspect of the Model 3's pricing. The Investment Tax Credit made SolarCity's Solar Lease program possible; changes to this program may cause a major downtown to the company's business. Any changes to these programs by a Trump administration could significantly harm Tesla's business. A trade war with China or South Korea may however, help Tesla.