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Case Study: Reducing Passive Business Income Taxes With Solar Sales Leaseback Purchases

Passive business income plays a significant role in many investment ventures, and understanding the tax implications is crucial for optimizing financial outcomes. It refers to earnings generated from activities in which the individual has limited or no active involvement. This could include rental income from real estate properties, royalties from intellectual property, or income generated from investments in partnerships, limited partnerships or S corporations.

Passive income is often subject to specific tax considerations that can impact its overall profitability. 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 passive business income can mitigate their tax burdens and optimize their financial outcomes through buying a solar Sales-Leasback project, which provides an opportunity to reduce taxable income and generate extra income at the same time

So let’s get started!

What Are The Financial Benefits Of Buying Solar Projects? 

Buying qualified solar projects can substantially reduce the taxes from passive business income. 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:

  • Depreciation: the amount of value that a physical asset loses over time. From a tax standpoint, depreciation is relevant because you can take a deduction for some or all of the amount of the value an asset loses over the first 5 years and primarily in year 1 due to bonus depreciation, reducing your taxable income and saving money on your state and federal taxes.
  • Tax credits: a dollar-for-dollar reduction in the amount of taxes you owe. The government lets you deduct a certain percentage of the solar project costs from your federal taxes. 
  • Income stream: solar projects that qualify for advantaged tax treatment also typically include 15-25 year income streams tied to the sale of energy produced by the project. 

You can read more about depreciation here and the benefits of solar tax project purchases here.  In the meantime, let’s jump into a case study to illustrate the potential financial benefits from a sale leaseback solar project.

Passive Business Income Case Study Walk-through

Carl and Mia are a married couple and S Corp shareholders from California that don’t not have material participation in the corporation.  In 2023, they expect to have a passive income of $2,500,000 and, as a result, they’re looking at $925,000 in federal taxes and $332,500 in California taxes at the end of the year. After paying $1,257,500 in total taxes, that would leave Carl and his wife with $1,242,500 — a 50% haircut.

However, buying a sale leaseback solar project could earn the family significant tax credits, depreciation deductions, and ongoing income to mitigate their high tax burden.

Specifically, imagine that the family chooses to put $600,000 in solar projects this year. They can reduce their tax bill from $1,257,500 to up to $859,460 in the first year, and in addition reduce their tax bills by up to $92,256 in the following 5 years, and earn $600,000 in income over the next 20 years.

Situation Overview:

  • Income: $2.5M
  • Expected taxes without solar benefit: $1.257M

Solar impact:

  • Investment: $600K
  • Tax savings: up to $490K
  • Income: $600K


  • Total tax savings: Reduce federal and state taxes by up to $490,296 (81% of the $600,000 investment). This is money the couple otherwise would have lost to taxes.
    • Depreciation: $250,296 in tax savings, or 41% of the initial investment over the first six years with $158,040 of those tax savings coming in year one.
    • Tax Credits: $240,000 in tax savings in the first year, or 40% of the initial investment for this particular project
  • Total Income: $600,000 (5% of initial investment per year for 20 years). Solar projects that qualify for advantaged tax treatment under the IRA typically include 20 year income streams tied to the solar 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 around 5% income annually on your investment.

Year by year tax savings and income: Below, you can see the year-by-year tax savings from tax credits and Federal and State depreciation for Carl and Mia 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

These tax credits and revenue distributions for 20 years add up to $1,090,296, none of which the family would have received without their solar investment.

What If The Couple Chose Not To Purchase A Solar Projecy?

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. If Carl and Mia don’t buy the solar project, they’ll be sending most of that money to the IRS. 

Situation Overview

  • Tax bill: $1,257,500
  • Amount not invested in solar: $600,000
  • Missed Tax Savings & Income from Solar: up to $1,090,296

Return On Investment

If the couple chose to pay their taxes instead of purchasing a solar project, they would owe that full tax bill of $1,257,500, leaving them with $1,242,500 Compare that to the additional $490,296 they would gain in tax savings from the solar sale leaseback plus the $600,000 they would gain from income. 

This is a 5.5x return on investment. Here is how we get there:

  1. Consider $1.2 million of their income. Their tax bill on that amount without a solar purchase would have been about $600,000.
  2. If they didn’t buy a solar project, they’d have had $600,000 left come next April.
  3. Instead, they took the $600,000 that they would have paid to the government and purchased a solar project that yields $490,296 in tax savings. They paid $600,000 for the solar project, and they’ll still owe $109,704 in taxes. As a result, out of the original $1.2 million, they’ll have $490,296 left (as compared to $600,000, after taxes, if they had not started the solar business).
  4. Accordingly, Carl and Mia have $109,704 “at risk” — the difference between what they would have had in their bank account had they just paid their taxes ($600,000) and what they have in their account after the solar purchase + tax savings ($490,296).
  5. Now consider the future benefits of the couple’s solar project: $600,000 in total revenue over the life of the project (20 years). That is almost a 5.5x return on the couple’s at-risk capital. Not bad for a pot of money that would otherwise have gone to the tax collector.

(Carl and Mia also could have earned a different type of return from a solar purchase, focused more on up-front tax savings and less on ongoing income, via a “flip partnership.” You can read more about the various solar structures here.)

Hopefully, the benefits from buying solar projects 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 participation” and other regulatory requirements) here

What Are The Depreciation And Tax Credit Constraints?

For passive business income, there is no limit to your depreciation write-off, so there is no depreciation cap in Carl and Mia’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 $2,116,000, which is the net value between their $2,500,000 income and their $384,000 savings from federal depreciation (tax savings from depreciation in year 1 are $142,080 and assuming a 37% federal tax bracket, Carl and his wife’s savings from depreciation would then be $384,000). Their income would fall into the 37% federal income tax bracket, so their federal income taxes would be around $782,920. The couple could write-off up to $587,190 in year 1 from tax credits (75% of $782,920 for the current tax year, so in this case, they could write-off all $240,000 of their tax credits from the sales leaseback project and could invest more to increase their tax savings and returns!).

Active Participation Requirement

Critically, to qualify for the tax benefits of the IRA’s solar program, individuals with passive business income don’t need to be active in the solar business. This means they don’t have to actively participate in the solar managing their solar business to get the tax savings, so the tax benefits of solar are easier to attain for individuals with passive business income.

For both, individuals with active business income and individuals with non-business income, 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 our Active Participation article to understand all the requirements, regulations and activities involved.


Investing in solar projects can help with passive business income to mitigate taxes and offset a large part of the tax they 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 investment firms to facilitate the purchase of solar projects. We will help you identify the opportunity and choose between different solar 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.

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!