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Reducing Passive Business Income Taxes With Solar Flip Partnership Purchases
Passive business income plays a significant role in many investment ventures, and understanding the tax implications is crucial for optimizing financial outcomes. In this article, we’ll explore how participating in solar projects can help individuals offset passive income and reduce their overall tax burden.
What is Passive Business Income?
Passive business income refers to earnings from activities in which the individual does not materially participate. Common examples include rental income from real estate, royalties from intellectual property, or income and gains from investments in partnerships where the investor is a Limited Partner (LP).
To mitigate the tax burden on passive business income, individuals can explore alternative strategies. One effective strategy is purchasing solar projects, which can significantly reduce tax liabilities while enhancing overall financial outcomes.
What Are The Financial Benefits Of Buying Solar Projects?
Purchasing qualified solar projects can substantially reduce taxes from passive business income. The basic benefits of qualified solar infrastructure purchases are massive, and we explain them in detail in this article.
In summary, the financial benefits you receive are:
Tax credits: a dollar-for-dollar reduction in the amount of taxes you owe. The government lets you deduct a percentage of the amount you spend on a solar project from your federal taxes.
Depreciation: the amount of value that a physical asset loses over time. From a tax standpoint, depreciation is relevant because you can take a deduction for some or all of the amount of the value an asset loses over time, reducing your taxable income and saving money on your state and federal taxes.
Income stream: solar projects also typically include 20-30 year income streams tied to the sale of energy produced by the project.
You can read more about depreciation here and the benefits of solar tax credits here. In the meantime, let’s jump into a case study to illustrate the potential financial benefits from a sale leaseback solar project.
Passive Business Income Case Study Walk-through
Carl and Mia, a married couple from California, are limited partners in a fund expected to generate $3,000,000 in passive income in 2025. At that level, they face an estimated $1,509,000 in combined federal and California taxes, assuming the highest federal marginal rate of 37% and California’s top rate of 13.3%. After paying those taxes, they would be left with approximately $1,491,000.
However, participating in a solar flip partnership project could earn the family significant tax credits, depreciation deductions, and ongoing income to mitigate their high tax burden.
Specifically, imagine that they choose to contribute $600,000 in a flip partnership solar project this year. As a result, the family could reduce their tax bill in 2025 from $1,509,000 to up to $650,551 and also reduce it by up to $126,403 more in the following 5 years.
Let’s now see the numbers:
Situation Overview:
Income: $3,000,000 in 2025
Expected taxes without solar benefits: $1,509,000
Solar Impact:
Purchase amount: $600,000
Tax Savings: up to $858,449 in year 1
Results:
Total tax savings: As a result of their solar purchase, the couple’s total tax bill will come down from $1,509,000 to $650,551 in year 1. That’s a total reduction in federal and state taxes of up to $858,449 in year 1, or 143.1% of the $600,000 purchase amount.
Tax Credits: $475,200 in tax savings in the first year, or 79.2% of the purchase amount.
Federal Level Depreciation: $351,648 in tax savings, or 58.6% of the purchase amount. (100% of this depreciation credit is available in year 1; federal depreciation saving calculations are based on highest federal marginal tax rate of 37%.)
State Level Depreciation: $158,004 in tax savings, or 26.3% of the purchase amount. (Up to 20% of this depreciation credit is available in year 1, and the remainder will be spread over the following five years; state depreciation saving calculations are based on highest state marginal tax rate of 13.3%.)
Year-by-Year Tax Savings:
Below, you can see the year-by-year tax savings from tax credits and Federal and State depreciation for Carl and Mia taking into account their particular situation.
Tax credits and depreciation are subject to limitations based on the type and amount of income you’re applying them against in a given calendar year. However, any unused credits or depreciation can be carried forward to future years—they don’t expire or get lost. You can read more about these limitations here.
Total Income: In addition to tax benefits, this strategy includes a cash flow component. Estimated distributions are around 1% of the purchase amount, which would be roughly $6,000 yearly and about $30,000 total over five years on a $600,000 purchase amount. While projections are subject to variation, these estimates are based on typical performance and current tax law.
What if Carl and Mia chose not to purchase a solar project?
This is, of course, a common question: How would they do if they simply paid their taxes and invested the remaining money? This is a pretty simple comparison as if the family doesn’t put $600,000 into the solar project, they would owe more than that in taxes. Given that their income is $3,000,000.
Situation Overview:
Tax bill: $1,509,000
Amount not put in solar: $600,000
Total Missed Tax Savings & Cashflow from Solar: up to $1,014,852
Net Loss: -$414,852
Results:
If they simply paid their taxes, they’d owe the full $1,509,000. By contrast, participating in the flip partnership would generate about $1,014,852 in tax savings and cash flow. Subtracting the $600,000 cost of the solar purchase, that’s a net gain of $414,852 compared to doing nothing.
The key point: the $600,000 they put in solar is money they’d otherwise send to the IRS and never get back. Instead, solar allows them to redirect those “lost dollars” into something that generates additional tax savings, produces cash flow, and contributes to a cleaner environment.
Some people try to compare this to investing the same amount in the stock market—but that’s not an apples-to-apples comparison. You invest after-tax dollars in the stock market. With solar, you’re putting pre-tax dollars—money you’d otherwise send to the IRS—to work for you.
Claiming Solar Tax Benefits Without Material Participation
Since Carl and Mia are using the tax incentives to offset their passive income, they are not required to materially participate in the solar business. They are allowed to apply the tax benefits against their passive business income without doing material participation. You can learn more about material participation on our blog post or watch our explainer video.
Conclusion
Purchasing solar projects can be an effective strategy for high-income earners with significant ordinary income to reduce their tax liability.
How can you go about buying qualified projects? It’s relatively simple: Valur has partnered with reputable developers to make solar projects accessible to high-income earners. We help you identify and evaluate available opportunities, compare different project options, and visualize the potential benefits—using a calculator tailored to your specific income situation.
From there, we’ll help you seamlessly finalize your purchase—with no fees charged to you by Valur.
To learn more you can schedule a call with us here.
Need some help to understand which if this is the right fit for you?
We’ve built a platform that makes advanced tax planning – once reserved for ultra-high-net-worth individuals – accessible to everyone. With Valur, you can reduce your taxes by six figures or more, at less than half the cost of traditional providers.
From selecting the right strategy to handling setup, administration, and ongoing optimization, we take care of the hard work so you don’t have to. The results speak for themselves: our customers have generated over $3 billion in additional wealth through our platform.
Mani is the founder and CEO of Valur. He brings deep financial and strategic expertise from his prior roles at McKinsey & Company and Goldman Sachs. Mani earned his degree from the University of Michigan and launched Valur in 2020 to transform how individuals and advisors approach tax planning.
