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Unlocking the full potential of your salary involves strategic financial decisions beyond the earnings themselves. For employees working in startups or public or private companies, high ordinary income often leads to substantial tax burdens. Fortunately, there’s a solution to mitigate these taxes and enhance the value of your salary: investing in solar projects.
In this article, we’ll explore a case study demonstrating how solar asset purchases can offset nearly 100% of the taxes associated with your salary, providing a unique avenue to optimize your financial outcomes.
Before delving into the case study, let’s establish a foundational understanding of the tax benefits linked to solar investments.
Buying qualified solar projects can substantially reduce taxes from salary. The basic benefits of qualified solar infrastructure investments are massive, and we explain them in detail in this article.
In summary, the financial benefits you receive are:
Mary is a lawyer in California. In 2024, she will earn $1,000,000. As a result, she expects to have a substantial tax bill: around $503,000 in federal and California taxes in 2024.
Purchasing a qualifying solar project, however, could earn Mary significant tax credits, depreciation deductions, and ongoing income to mitigate her high tax burden. Below, we’ll walk through how she can use a solar project to reduce her taxes in 2024.
Specifically, imagine that she chooses to invest $300,000 in a flip partnership solar project this year. As a result of this investment, she could reduce her tax bill in 2024 by $409,215 and save an additional $98,417 of taxes in the following five years. Here are the numbers:
Situation Overview:
Solar Impact:
Results:
Total Tax Savings:
As a result, Mary’s total tax bill will drop from $503,000 to as low as $93,785. That’s a total reduction in federal and state taxes of up to $409,215, or 136% of the $300,000 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 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: $15,000. While Mary will receive some income distributions over the early years, While the couple will receive some income distributions over the early years, the lion’s share of the project revenue will go to the lender as a result of the flip partnership structure. See our guide to solar flip partnerships for more information.
Phantom Income Tax Liability: -$38,400. Phantom income occurs when an individual is taxed on the value of their stake in a partnership (or another entity), even if the individual does not receive any corresponding cashflow. 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 used to pay down partnership debt (as is the case for most solar flip partnerships), the partner may still owe tax on the full $10,000. As a result, Mary is taxed on income she never receives. In this case, the “phantom income” tax liability totals $38,400.
What if Mary chose not to start a solar business?
This is a common question: How would Mary do if she simply paid her taxes and invested the remaining money? This is a pretty simple comparison. If Mary doesn’t put $300,000 into the solar project, she would owe more than that in taxes.
Situation Overview:
Results
If Mary chose to just pay her taxes instead of investing in solar, she would owe the full $503,000 of taxes. She would gain $109,215 in tax savings from the flip partnership investment ($409,215 in tax savings minus the $300,000 cost of the solar purchase).
(Mary also could have earned a different type of return, focused more on ongoing income and less on upfront tax savings, via a “sale leaseback.” You can read more about the various solar purchase structures here.)
Hopefully, the benefits from solar investments are now clear, but there are a couple of qualifications and limitations that investors should take into account and you can read more about the mechanics (including “active investor” and other regulatory requirements) here.
Depreciation will be capped for investors earning W-2 (i.e., salaried income) at $305,000 per individual per tax year, or $610,000 per couple per tax year if you have an active solar business. However, if you have excess depreciation, you can roll it forward and apply it to future tax years. In the example above, Mary’s depreciation in the first year would be $123,688, well below the cap.
In addition, you can only write off 75% of your remaining federal tax liability with tax credits. If you have excess tax credits for the current tax year, you can apply them to your taxes from the past three years or roll them forward and apply them over the next 22 years. In Mary’s example, his federal taxable income would be $711,000, which is the net value between his $1,000,000 income and his $289,000 savings from federal depreciation (tax savings from depreciation in year 1 are $106,930 and assuming a 37% federal tax bracket, Mary’s savings from depreciation would then be $289,000). His income would fall into the 37% federal income tax bracket, so his federal income taxes would be around $263,070. He could write off up to $197,302 in year 1 from tax credits (75% of $263,070 for the current tax year, so in this case, he could write off all $187,110 of his tax credits from the flip partnership and could put in more to increase his tax savings and returns).
Hopefully, the benefits from buying solar projects are now clear, but there are a couple of qualifications and limitations that individuals 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 materially participate in business. You will need to set up an LLC focused on running your solar business and you will also need to spend 100 hours per year participating in the solar business. This is a bit difficult for some people, 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 income tax liabilities. 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 investing in qualified projects? Valur has partnered with nationally recognized accounting and investment firms to facilitate the purchase of solar projects. We will help you identify the opportunity and choose between different solar project opportunities, visualize the potential benefits, and calculate how much you need to invest to capture the right sized tax credits. From there, we and our partners will help you seamlessly finalize your investment 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!
