Case Study: Reducing C Corporation Taxes With Solar Tax Credits

A C Corporation has particular tax implications and understanding the intricacies of taxation is crucial for optimizing your company’s financial outcomes. In this article, we will explore how C corporations can reduce their tax burdens and maximize their financial potential with a simple solution: buying solar tax credits. 

Let’s begin with the basics. 

What Are Tax Credits?

A tax credit is a dollar-for-dollar reduction in the amount of taxes you owe. It is in a sense similar to a gift card or store credit you can use to reduce your tax bill.

Tax credits show up throughout the tax code. Some of the more well known credits include the child tax credit (which you receive for providing for a child) and the electric vehicle tax credit (which you get for buying a qualifying electric vehicle), but there are many of these opportunities. 

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 increasing incentives tied to renewable energy incentives. In particular, the investment tax credits (or ITCs) in the 2022 Inflation Reduction Act are a particularly attractive opportunity to reduce your income tax. Read more about the IRA’s investment tax credits here.

What Are The Advantages of Buying Solar Tax Credits? 

Buying solar tax credits can substantially increase the C Corporation’s profitability by minimizing its taxes and at the same time align with corporate social responsibility initiatives.. In summary, the benefits are:

• Reduced Tax Liabilities: One of the primary advantages of purchasing tax credits is the ability to reduce a C corporation’s tax liabilities. How can that be possible? Corporations can buy and sell solar tax credits at approximately $0.9 per tax credit. This means that for every dollar of tax credits a company buys, it only spends $0.9, representing an 11% immediate savings.

• Enhanced Corporate Social Responsibility (CSR): In certain regions, tax credits are associated with specific social or environmental initiatives, such as renewable energy projects or community development programs. By buying these targeted tax credits, C corporations can demonstrate their commitment to sustainability and community support, improving their brand image and reputation among stakeholders.

Buying Tax Credits Case Study Walk-through

Nexus is a C Corporation established in Delaware that expects to have an income of $50,000,000 in 2023. As a result, it will have a substantial tax bill: $10,050,000 in income taxes or 21% of its total income. Buying tax credits, however, could help the C-corp mitigate some of its tax burden. 

As previously mentioned, Nexus could buy tax credits for renewable energy projects at approximately $0.9 per tax credit. This means that for every dollar of tax credits the company buys, it only spends $0.9, representing a 10% immediate saving. Specifically, imagine that Nexus chose to purchase $7,000,000 in investment tax credits. The actual investment for those $7,000,000 tax credits would be $6,300,000, resulting in a net tax saving of $700,000, not bad for an amount that would otherwise have gone to the tax collector!

An important constraint to take into account is the fact that Corporations can only write-off 75% of their tax liability per year with tax credits. For this example, their  income taxes would be $10,050,000, (21% of $50,000,000), so Epic industries could write-off up to $7,537,500 in 2023 (75% of $10,050,000 for the current tax year).

If Nexus has excess tax credits for the current tax year, they can apply them to taxes from the past 3 years or roll them forward and apply them over the next 22 years. As an alternative, tax credits can also be traded and monetized in certain jurisdictions. This means that Nexus could sell excess or unused tax credits to other entities in need of such credits. This presents an opportunity for corporations to generate additional revenue streams by selling tax credits they do not require. 

Active Participation Requirement

Critically, a C Corporation by definition is active in any business it participates in, so a C Corporation doesn’t need to to actively participate in the solar business. Solar tax benefits are easier to attain for C Corporations. On the contrary, for individuals with active business income and individuals with non-business income for example, they will need to materially participate in the solar business. However, good news is there are a couple of features that make the requirement less onerous and you can read more about them here.

Conclusion

Purchasing tax credits offers many financial benefits for C corporations. From reduced tax liabilities to potential for trading and monetization, this practice can significantly improve a corporation’s financial position. Additionally, it allows corporations to align their tax strategies with their corporate social responsibility objectives. By leveraging tax credits effectively, C corporations can enhance profitability, gain a competitive edge, and contribute to their overall success. 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 solar tax credits? It’s relatively simple: Valur has partnered with nationally recognized accounting and investment firms to facilitate the purchase solar projects. We will help you identify the opportunity and choose between different opportunities, understand 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.

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 so 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 $1.1 billion in additional wealth for our customers.

If you would like to learn more, please feel free to explore our Learning Center, check out your potential tax savings with our online calculators, or schedule a time to chat with us!