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 […]
Green energy is having its moment. Almost half of all new homes in the United States have solar panels. And the Biden Administration and Congress have decided to go all in to incentivize investment in renewable resources.
In particular, the Inflation Reduction Act (IRA) increased and extended previously available tax benefits — tax credits and depreciation — for specific renewable energy projects, including solar.
In case you haven’t read about tax credits and depreciation from our previous articles, you can do so here. In summary, tax credits are a dollar-for-dollar reduction in the amount of taxes you owe. The government lets you deduct a certain percentage of solar purchase costs from your taxes. Depreciation, instead, refers to the amount of value that a physical asset loses over time. You can take a tax 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 taxes.
The basic tax benefits of buying qualified solar infrastructure projects are massive, you can receive up to 130% of your purchase in tax savings in year 1, as we explain in detail in our solar project purchase tax benefits guide.
A solar flip partnership is a partnership with three partners: a sponsor (the developer), an individual (you), and a bank that provides a loan. The sponsor partner is responsible for developing and operating the renewable energy project, the individual partner provides funding for the project, and the bank provides debt financing that increases the total amount in the project and the tax credits and depreciation available to you.
The structure uses leverage to increase the amount of tax credits and depreciation that an individual receives from a given solar project. By borrowing, the individual can increase the amount of cash in the project and, as a result, the tax credits and depreciation available. You can read more about the details in our guide to solar flip partnerships.
The flip partnership structure allocates most of the tax credits and depreciation — typically 99% of the tax benefits — to the individual. The individual can then use the tax credits and depreciation created from the lender’s loans, thereby increasing the tax benefits they receive without increasing their initial amount. In return for these upfront tax benefits, the lender receives the majority of the cash flow from the project over its lifetime.
With those details out of the way, let’s take a look at a case study to illustrate how leverage can significantly increase your returns from solar purchases.
Aaron is a married California resident with $1,000,000 in income in 2025, and, as a result, he’s looking at $503,000 in federal and California taxes at the end of the year, more than a 50% haircut.
As we explained in earlier articles, however, buying a qualifying solar project could earn Aaron and his wife significant tax credits, depreciation deductions, and ongoing income to mitigate their high tax burden.
Specifically, imagine that the family chooses to put $200,000 in a flip partnership solar project this year. As a result of this purchase, Aaron is positioned to reduce his 2025 tax bill by $300,569 and save an additional $44,688 of taxes in the following five years. Here are the numbers:
Situation Overview:
Solar Impact:
Total Tax Savings:
As a result, Aaron’s total tax bill will drop from $503,000 to as low as $202,431. That’s a total reduction in federal and state taxes of up to $300,569, or 150.3% of the $200,000 purchase amount in Year 1, there’s also $44,688 in tax savings available from Year 2 to 6 that’s an additional 22.34% return on the $200,000 purchase amount.
In other words, Aaron could receive more in immediate tax savings than he contributed, making this one of the most efficient ways to reduce his tax burden.
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 $2,000 in the first year and about $12,000 total over six years on a $200,000 purchase amount. While projections are subject to variation, these estimates are based on typical performance and current tax law.
What if Aaron chose not to start a solar business?
This is a common question: How would Aaron do if he simply paid his taxes and invested the remaining money?
This is a pretty simple comparison. If Aaron doesn’t put $200,000 into the solar project, he would owe more than that in taxes. Given that Aaron’s income is $1,000,000.
Situation Overview:
Key Results at a Glance: Aaron saves more than he contributes
If Aaron chose to pay his taxes instead of purchasing solar projects, he would owe that full tax bill of $503,000. Compare that to the additional $157,257 he would gain in tax savings and cashflow from the flip partnership ($345,257 in tax savings minus the $200,000 cost of the solar purchase).
Compare the Alternatives:
(Aaron 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 purchases are now clear, but there are a couple of qualifications and limitations that individuals should take into account. You can read more about the mechanics (including “material participation” 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, Aaron’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 Aaron’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, Aaron’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 employees with high ordinary income to mitigate taxes and offset a large part of the tax he would otherwise owe. 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 buying qualified projects? It’s relatively simple: Valur has partnered with nationally recognized accounting and 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 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.
Need some help to understand which if this is the right fit for you?
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!
