The purpose of estate tax planning is to maximize the assets you pass on to future generations by minimizing gift and estate taxes. Estate-tax strategies revolve around the use of irrevocable trusts. This article discusses the most common types of irrevocable trusts that are used to minimize gift and estate […]
Active business income is the lifeblood of many entrepreneurs and self-employed individuals. It represents the earnings generated by actively operating a business or providing services. Whether you are a sole proprietor, a partner in a partnership, or an owner of a closely-held corporation, the income you generate from your active involvement in the business is considered active business income.
However, one of the downsides of active business income is the significant tax burden it carries. Fortunately, there is a solution that can help mitigate these taxes and optimize financial gains: buying solar projects.
The world is pivoting towards sustainable energy solutions and as a result, the federal government will make the single largest investment in climate and energy in American history, providing an estimated $369 billion in tax incentives to shift America’s energy dependance towards renewable energy, including solar.
In this article, we will explore how individuals earning active business income can mitigate their tax burdens and optimize their financial outcomes through buying a solar Flip Partership project, which provides an opportunity to reduce your taxable income.
So let’s get started!
Buying qualified solar projects can substantially reduce active business income taxes. The basic benefits of buying qualified solar infrastructure projects are massive, and we explain them in detail in this article.
In summary, the financial benefits you receive are:
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.
Mike and Mary are a successful couple from California that run an e-commerce company that sells toys. In 2024, their estimated income is $3,000,000 and, as a result, they are looking at $1,509,000 in federal taxes and California taxes at the end of the year. After paying their total taxes, that would leave Mike and his wife with $1,491,000.
Buying a qualifying solar project, however, could earn the couple significant tax credits, depreciation deductions, and ongoing income to mitigate their high tax burden. Below, we’ll walk through how Mike and Mary can buy a solar business to reduce their taxes in 2024.
Specifically, imagine that they choose to put $700,000 in a flip partnership solar project this year. As a result of this purchase, the family could reduce their tax bill in 2024 from $1,509,000 to up to $667,155 and also reduce it by up to $229,638 more in the following 5 years.
Let’s now see the numbers:
Situation Overview:
Solar Impact:
Results:
Total tax savings: As a result of their purchase, the couple’s total tax bill will come down from $1.509,000 to up to $437,517. That’s a total reduction in federal and state taxes of up to $1,071,483, or 153% of the $700,000 purchase amount.
Year-by-Year Tax Savings:
Below, you can see the year-by-year tax savings from tax credits and Federal and State depreciation for Mike and Mary taking into account her particular situation. You can also play with our online calculator to customize it with your own numbers and see your potential savings here
Total Income: $35,000. While they will receive some income distributions over the early years, the lion’s share of the project revenue will go to their partners as a result of the flip partnership structure. See our guide to solar flip partnerships for more information.
Phantom income tax: -$89,600. Phantom income occurs when an individual is taxed on the value of their stake in a partnership (or another equivalent agreement), even if they do not receive any cash benefits or compensation. For example, if a partnership reports $100,000 in income for a fiscal year–and a partner has a 10% share in the partnership–that individual’s tax burden will be based on the $10,000 in profit reported. Even if that sum is not paid to the partner because, for example, it is rolled over into retained earnings, reinvested in the business or in the case of most solar flip partnerships being used to pay down partnership debt, the partner may still owe tax on the full $10,000. As a result, the couple is taxed on income they never receive or “phantom income”, in this case, for a total of -$89,600.
What if Mike and Mary chose not to start a solar business?
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 $700,000 in the solar project, they would owe more than that in taxes and be sending $700,000 to the IRS.
Situation Overview:
Results:
If Mike and Mary chose to pay their taxes instead of purchase solar proects, they would owe that full tax bill of $1,509,000 Compare that to the additional $153,120 they would gain in tax savings from the flip partnership ($1,071,483 in tax savings – $700,000 in the cost of the solar purchase).
(The couple also could have earned a different type of return, focused more on ongoing income and less on up-front tax savings, via a “sale leaseback” You can read more about the various solar purchase structures here). Hopefully, the benefits from solar purchases are now clear, but there are a couple of qualifications and limitations that people should take into account and you can read more about the mechanics (including “active participation” and other regulatory requirements) here.
For individuals earning active business income, there is no limit to your depreciation write-off, so there is no depreciation cap in Mike and Mary´s example.
In addition, you can only write-off 75% of your remaining federal tax liability with tax credits (after applying the depreciation tax savings) and if you have excess tax credits for the current tax year, you can apply them to your taxes from the past 3 years or roll them forward and apply them over the next 22 years. For this example, their federal taxable income would be $2,010,398, which is the net value between their $3,000,000 income and their $989,602 savings from federal depreciation (federal tax savings from depreciation in 2024 are $366,153 and assuming a 37% federal tax bracket, Mike and his wife’s saving from depreciation would then be $989,602). Their income would fall into the 37% federal income tax bracket, so their federal income taxes would be around $743,847. The couple could write-off up to $557,885 in year 1 from tax credits (75% of $743,847 for the current tax year, so in this case, they could write-off all $436,590 of their tax credits from the flip partnership project and could put in more money to increase their tax savings and returns!)
Hopefully, the benefits from buying solar projects are now clear, but there are a couple of qualifications and limitations that you should take into account and you can read more about the mechanics (including “active participation” and other regulatory requirements) here.
To qualify for the tax-credit portion of the IRA’s solar program, you will have to have material participation in business. You will need to set up an LLC focused on running your solar business and you will also need to actively participate in your solar business. This is a bit tougher for many, but a couple of features make the requirement less onerous:
You can also read our Active Participation article to understand all the requirements, regulations and activities involved.
Purchasing solar projects can help people reduce their active business income taxes. If you have any accounting questions, we have put together an overview of the most common technical doubts accountants have for us and you can read them here.
So, how can you go about purchasing qualified projects? It’s relatively simple: Valur has partnered with nationally recognized accounting and investment firms to facilitate. We will help you identify the opportunity and choose between different solar opportunities, visualize the potential benefits, and calculate how much you need to put in to capture the right sized tax credits. From there, we and our partners will help you seamlessly finalize your purchase and keep track of the relevant data for ongoing tax purposes. To learn more you can schedule a call with us here.
We’ve built a platform to give everyone access to the tax and wealth-building tools typically reserved for wealthy individuals with a team of accountants and lawyers. We make it simple and seamless for our customers to take advantage of these hard-to-access tax-advantaged structures. With Valur, you can build your wealth more efficiently at less than half the cost of competitors.
From picking the best strategy to taking care of all the setup and ongoing overhead, we make things simple. The results are real: We have helped create more than $3 billion in additional wealth for our customers. If you would like to learn more, please feel free to explore our Learning Center. You can also see your potential tax savings with our online calculators or schedule a time to chat with us!
