Key highlights:

Renewable energy is experiencing a surge in popularity, both on the consumer market — how many houses on your street have installed rooftop solar panels over the past few years? — and among builders and solar purchasers. This is unsurprising; since 2022, Congress and the White House have gone all in on incentivizing investment in green technologies. As a result of these shifts, solar energy projects have become increasingly attractive for solar purchaser, both socially and financially.

The potential financial returns are significant: For a typical high earner, purchasing a solar energy project can increase take-home income by 35% or more. And these benefits apply broadly; they can reduce all forms of personal and business taxable income, including income from salary, RSUs, a bonus, business profits, capital gains, and other sources. 

In this guide, we’ll explore the financial benefits of solar projects, the process of buying in, the risks, a real-life example, and a few other considerations.

The Benefits of Solar Asset Purchases

The government offers three main benefits for individuals looking to buy qualified solar projects.

Investment Tax Credits

A tax credit is a dollar-for-dollar reduction in the amount of taxes you owe. It is similar to a gift card or store credit you can use to reduce your tax bill. For example, if you owe $1,000 in taxes and you have a $600 tax credit, your tax liability will be reduced to $400.

The government typically offers tax credits to incentivize certain behaviors or investments. Over the last few years, tax credits have become an increasingly popular tax-mitigation tool due to incentives tied to renewable energy.

Depreciation

Depreciation is the amount of value that a physical asset loses over time. From a tax standpoint, it is relevant because you may be able to take a deduction for this amount, reducing your taxable income and saving money on your taxes. 

Let’s say you have a $2 million income and would owe $750,000 in federal taxes. (We’ll ignore state taxes here.) If you had $800,000 in depreciation, you would be able to use that depreciation to write off $800,000 of income, leaving you at $1.2 million of taxable income. As a result, you would owe only $440,000 in federal taxes, a savings of $310,000.

Income Stream

Solar projects typically include 15-25 year income streams tied to the energy produced by the project. These returns depend on the location of the project and local energy rates among other factors but typically will generate between 3-7% annually of your purchase amount amount.

You can read a detailed article about these benefits here. 

Popular Solar Structures

So, you understand the general benefits from buying solar projects. Now, let’s talk about the different structures available.

Two of the most popular structures are flip partnerships and sale-leasebacks. Below, we will explain how each structure works and their financial benefits, risks, and comparisons. You can also read our in-depth article about them here.

Flip Partnership

A flip partnership allows solar purchasers to receive a greater share of the tax credits and depreciation relative to their purchase price. The partnership is structured with three partners: 

These structures work by allocating typically 99% of the tax credits and depreciation to the solar purchaser partner in the early years of the project. In return, the sponsor partner receives the majority of the cash flow from the project over its lifetime.

Who is this for?

Flip partnerships are a particularly good fit for individuals and businesses aiming to offset more than $500,000 in annual income. 

What are the financial benefits?

What are the structure’s risks?

You can read about a real-life flip partnership case study here.

Solar Sale-Leaseback

A sale-leaseback is a financial arrangement in which a solar project developer sells a solar system to a solar purchaser and then leases it back from them. This way, the individual benefits from tax incentives and a steady income stream from the project with minimal overhead, and the developer operates the system, maintains the system, and is able to take the risk and make a profit based on the spread between the price at which they sell the electricity and the price at which they pay the individual.

Who is this for?

Solar sale-leasebacks are a good fit for individuals who want cash flow and/or have smaller tax write-off needs.

What are the structure’s financial benefits?

What are the structure’s risks?

The Risks, Constraints, and Gray Areas of Solar Purchases

The potential benefits of solar projects are clear, but there are, of course, important risks and constraints to take into account.

The gray area: Material participation requirements

It is a general feature of the US’s system of taxes, credits, and deductions that the character of your credits and deductions must match the character of the income they are being used to offset. So, for example, depreciation from a passive real estate investment — one where you buy a property and rent it out without being actively involved — can only be used to reduce your passive rental income. Losses from an active real estate investment, by contrast, can be used to reduce your earned income (W-2 income, for example).

So, too, with solar. To offset active income like W-2 earnings, profits from a business you run, or most capital gains, you will have to be active in the solar business. (Note that this is not true for purchases in oil and gas wells due to a unique law benefiting the space, so that can be a viable alternative if you are unable to qualify as an active participant in solar. Note also that those with passive income can use the benefits of solar without qualifying as an active or material participant in the solar space.)

So what do you need to do to qualify as an active or material participant in solar? You will need to set up an LLC through which you will make your purchase, and you will also need to materially participate in your solar business. In this context, “material participation” means participating in the solar business for more than 100 hours during the tax year in activities that are considered regular, continuous, and substantial, and participating at least as much as any other individual involved in the business.

Why, then, do we call this a “gray area”? Due to the lack of clarity from regulators: The IRS and tax court have so far chosen not to define what activities constitute material participation in the solar space. As a result, there isn’t complete certainty as to what specific activities will satisfy the 100-hour requirement outside of the general guidelines of spending time on regular, continuous, and substantial activities that will benefit your solar business. (This is a very simplified explanation. For more details on material participation and common questions we hear from CPAs, check out this article.)

A quick detour from the rules: Tracking these hours and activities can be a headache, but Valur streamlines your documentation process, enabling you to save relevant documents and log your participation hours directly on our platform. Read more about those tools here.

Developer / solar project risk

Another important consideration is the quality of the developer. To utilize the tax credits and depreciation in a given tax year, the project has to achieve what’s called “Mechanical Completion” in the year you are targeting the tax savings. This effectively means the project has to be completed to the extent that it could be turned on (assuming it has the relevant permits and approvals) but does not need to be turned on. As a result, it’s important to look for (a) projects that have a clear timeline for completion in a given tax year and (b) developers with a strong track record.

Other constraints: Depreciation and tax credit cap 

Depreciation will be capped for solar purchasers earning W-2 income (i.e., salaried income) at $313,000 per individual or $616,000 per couple per tax year if you are “active” because of the excess business loss limitation. However, if you have excess depreciation, you can apply that excess depreciation in future tax years. Critically, if you are a business owner — if you have active or passive business income — there is no limit at all to the amount of depreciation you can apply.

On the other hand, the amount of tax credits you can apply in a given year is limited to 75% of your remaining federal tax liability after you apply depreciation. If you have excess tax credits for the current tax year, you can apply them to your taxes over the next 20 years.

Real-Life Example

Lara is a tech executive living in New York and plans to put $1,000,000 in a commercial solar project. Most commercial solar projects today have an immediate 40% tax credit. That’s $400,000 in tax credits right there, saving Lara $400,000 in taxes.

On to the second benefit: bonus depreciation. This will allow Lara to front-load the depreciation and take more of it in Year 1. She can claim 80% of the value in Year 1, and the rest over subsequent years. In a high-income-tax state like New York, she could end up with up to $300,000 in federal tax savings and $100,000+ in state tax savings on the $1,000,000 project over five years.

The third benefit is the income stream: Lara would be paid another $50,000 a year for the lifetime of the project.

Bringing it all together, Lara’s $1,000,000 in the solar project gets:

• A $400,000 federal tax credit.
• ~up to $640,000 of federal depreciation in Year 1, or $300,000 in tax savings for a top-bracket taxpayer.
• ~up to $800,000 of state depreciation or $100,000+ in tax savings in New York.
• $50,000 in income every year.

Not bad results at all! And you can also play with our online calculator to customize it with your own numbers and see your potential savings here.

If you’d like to read a more detailed example, please read about Priya’s case here. We also invite you to read another example of how Aaron managed to significantly his taxes by purchasing solar projects.

Conclusion

Purchasing solar projects such as flip partnerships and sale-leasebacks offers significant benefits for individuals looking to reduce their taxes and increase their long-term returns. The government provides incentives in the form of tax credits, depreciation, and income streams, making renewable energy purchases increasingly attractive for high earners.

If you have any accounting questions, we have put together an overview of the most common technical questions accountants have for us; you can read them here.

So, how can you go about purchasing qualified solar projects? It’s relatively simple: Valur has partnered with nationally recognized accounting firms to facilitate these purchases. We will help you identify the opportunity and choose between different types, visualize the potential benefits, and calculate how much you need to purchase to capture the right-sized tax benefits. From there, we and our partners will help you seamlessly finalize your purchase and keep track of the relevant data for ongoing tax purposes. 

About Valur

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!