Solar energy purchases offer significant tax benefits through two distinct structures. Each uses different leverage mechanics, creating meaningful trade-offs in tax credits, depreciation, cash flow, and risk. This guide breaks down how they work and when each structure tends to make the most sense.

Solar as a Tax Mitigation Strategy

For high-income earners, whether from W-2 wages, RSU vesting, bonuses, or business profits, the federal tax burden can be substantial. At the top marginal rate of 37%, a significant share of every additional dollar earned goes to taxes.

Solar energy projects offer a way to reduce that burden. By purchasing a qualifying solar project and actively participating in its operations, you can generate tax credits and depreciation deductions that offset your active income. This is not limited to business owners. W-2 earners, executives with large RSU payouts, and professionals with high salaries can all take advantage of these benefits.

The key requirement is material participation: the IRS requires that you spend more than 100 hours per year in qualifying operational activities related to the solar project. This ensures the activity is treated as “active” (non-passive) under IRC Section 469, which allows the resulting tax benefits to be used against your active income sources. Without material participation, the benefits would be classified as passive and could only offset passive income. You can learn more about material participation requirements here.

How Solar Purchases Generate Tax Benefits

Tax Credits (ITC). A tax credit reduces your tax bill dollar-for-dollar. If you owe $500,000 in taxes and hold a $200,000 tax credit, your liability drops to $300,000. Under the Inflation Reduction Act (extended through 2027), qualifying solar projects can generate credits worth 40 to 50% of eligible project costs, including a base 30% ITC plus potential 10% bonus adders for domestic content or project location.

Depreciation. Depreciation deductions reduce your taxable income. If you earn $2 million and claim $500,000 in depreciation, your taxable income drops to $1.5 million, saving roughly $185,000 in federal taxes at the 37% rate. Solar projects benefit from accelerated depreciation (MACRS), with a significant portion available in Year 1 due to bonus depreciation rules.

Income Stream. Operating solar projects generate revenue by selling electricity. After covering expenses like maintenance and insurance, remaining cash is distributed to the partners. These distributions typically range from 1 to 5% annually based on your purchase amount, for a period of 20 to 30 years depending on the project.

The Flip Partnership: How Ownership Works

Both Standard PPA and Prepaid PPA projects use the same underlying ownership structure: the flip partnership. This is a partnership between you (the solar purchaser) and a solar developer.

You provide the equity capital, and the developer brings their expertise in solar project development, construction, and technical operations. Together, you form a partnership where both parties contribute meaningfully: the developer handles the technical buildout while you take an active role in oversight, decision-making, and ongoing management of the solar assets.

Years 1 to 6: You hold 99% ownership and claim 99% of all tax benefits (credits and depreciation) generated by the project.

After the “flip” (Year 6+): Ownership reverses. The developer takes the majority share (typically 80 to 95%) and collects the bulk of ongoing cash flow. You retain a minority stake. By this point, the tax benefits have been fully realized, so the partnership shifts to distributing operating income.

This structure is what allows purchasers to capture outsized tax benefits relative to their capital: you claim 99% of the tax benefits on the total project value, which is typically much larger than your equity contribution alone. At the highest marginal tax rates, this can translate to approximately $1.30 to $1.40 in tax savings for every $1 purchased in Year 1. Read our in-depth Flip Partnership case study here.

What Is a PPA?

A Power Purchase Agreement (PPA) is a long-term contract where an “offtaker” (typically a homeowner, business, or public institution) agrees to buy the electricity generated by a solar system installed on their property. Instead of paying the utility company, they pay the partnership at a discounted rate. Read our detailed PPA explainer here.

The PPA creates a win-win: the offtaker gets cheaper, cleaner electricity with no maintenance burden, and the partnership receives a reliable revenue stream that supports the project’s economics.

There are two ways to structure this agreement, and the difference between them drives everything about how your purchase is leveraged and what returns you can expect.

Structure 1: Standard PPA

How it works

In a Standard PPA, the offtaker pays a monthly bill for the electricity generated by the solar system, similar to a regular utility bill but at a lower rate. For example, if the local utility charges 40 cents/kWh and the PPA rate is set at 25 cents/kWh, the offtaker saves meaningfully on their energy costs every month. This applies to both residential and commercial offtakers.

Where does the leverage come from? The developer arranges debt financing to match your equity contribution. For every $1 you contribute, the developer adds approximately $1 in debt, creating a total project value of roughly 2x your purchase amount.

Because you own 99% of the partnership, you claim tax benefits on the total project value, not just your contribution. This debt-funded leverage is what drives the Standard PPA’s economics.

Structure 2: Prepaid PPA

How it works

In a Prepaid PPA, the offtaker pays for the full contract term’s electricity upfront in a single lump sum, essentially prepaying their energy bill for the life of the agreement. In return, they typically receive the system at a roughly 30% discount compared to purchasing it outright, with no ongoing maintenance or insurance responsibilities during the initial term.

Where does the leverage come from? Instead of developer debt, the leverage comes from the offtaker’s prepayment. The offtaker contributes approximately 70% of the project cost, and you contribute the remaining 30%. This creates a total project value of roughly 2.78x your purchase amount, significantly higher leverage than the Standard PPA, with no debt involved.

Just like in a Standard PPA, you own 99% of the partnership and claim tax benefits on the total project value. But because the multiplier is higher, the total project value (and therefore the ITC) is significantly larger for the same dollar purchased

The Key Trade-Offs

Both structures deliver strong tax benefits, but they do so through different mechanisms. Understanding these trade-offs is essential to evaluating which structure aligns with your situation.

1. Tax Credits vs. Depreciation

This is the most important structural difference.

Because the Prepaid PPA has a higher project value multiplier (2.78x vs. 2.0x), it generates significantly more in tax credits (ITC). Tax credits are especially powerful because they reduce your tax bill dollar-for-dollar, not as deductions, but as direct credits.

The Standard PPA, by contrast, generates a substantially larger depreciation base. Depreciation reduces taxable income (not taxes directly), so its value depends on your marginal tax rate. Importantly, depreciation is also subject to the Excess Business Loss (EBL) limitation of $512,000 per year for married filers, which can cap how much you can use in any single year.

At a $500,000 purchase, the Prepaid PPA generates roughly $154,000 more in tax credits than the Standard PPA. The Standard PPA generates roughly $215,000 more in depreciation tax savings. The net advantage depends on your income level, purchase size, and how each benefit interacts with applicable limitations.

2. Cash Flow

This is a meaningful difference that is often overlooked when comparing the two structures.

In a Standard PPA, the offtaker pays monthly, creating an ongoing revenue stream for the partnership. You typically receive 1 to 5% of your purchase amount annually in cash distributions during the first 6 years, plus continued distributions (at your post-flip ownership percentage) for years 7 through 30.

In a Prepaid PPA, the offtaker has already paid upfront. There are no monthly payments flowing in, which means no cash distributions during the initial period. Your returns are concentrated entirely in tax benefits.

3. Risk Profile

The Standard PPA relies on developer-arranged debt, which means the project carries a debt obligation. It also depends on the offtaker continuing to pay their monthly bill, though default rates in residential and commercial solar PPAs are historically very low.

The Prepaid PPA eliminates both of these risks entirely. There is no debt on the project, and the offtaker has already paid in full. This makes it a structurally lower-risk path to the same category of tax benefits.

4. When Purchasers Tend to Prefer Each Structure

In practice, the right structure depends on purchase size, income level, and individual priorities.

For smaller purchases (under approximately $400K), the Standard PPA’s combination of depreciation, cash flow, and long-term post-flip distributions tends to produce a higher total return over the life of the project. Purchasers in this range who are focused on maximizing cumulative benefits often gravitate toward the Standard PPA.

For larger purchases ($500K and above), the Prepaid PPA’s ITC advantage becomes increasingly significant. The additional tax credits more than offset the Standard PPA’s depreciation and cash flow benefits, often producing a stronger Year 1 outcome. Purchasers deploying larger amounts of capital tend to find the Prepaid PPA more attractive, particularly if they also value the absence of project debt.

Side-by-Side Comparison

Choosing the Right Structure

Both structures provide meaningful tax benefits, and neither is universally better than the other. The right choice depends on a combination of factors including your income level, target purchase size, risk tolerance, and whether you prioritize Year 1 benefits or total lifetime returns.

Purchasers seeking to maximize total cumulative returns over the life of the project, including ongoing cash flow and post-flip distributions, tend to lean toward the Standard PPA. This is especially common at purchase amounts under $400,000, where the depreciation and cash flow advantages are most pronounced.

Purchasers deploying $500,000 or more, or those who place a premium on a debt-free structure, tend to prefer the Prepaid PPA. The higher ITC generation and cleaner risk profile make it a popular choice for larger capital deployments.

Many purchasers use both structures across different projects, depending on the opportunity and their tax planning needs in a given year.

Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. All figures are estimates based on general assumptions and may vary depending on your specific income, tax situation, project details, and applicable federal and state tax rates. Consult with your CPA or tax advisor before making any decisions. Valur does not provide tax advice.

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