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Reducing Passive Business Income Taxes With Solar Flip Partnership Purchases

Passive business income plays a significant role in many investment ventures, and understanding the tax implications is crucial for optimizing financial outcomes. In this article, we will explore how individuals earning passive business income can mitigate their tax burdens through acquiring solar businesses.

What is Passive Business Income? 

Passive business income 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. However, passive income is often subject to specific tax considerations that can impact its overall profitability.

To mitigate the tax burden on passive business income, individuals can explore alternative strategies and investments. One such strategy is purchasing solar projects, which offer a means to offset tax liabilities and optimize financial outcomes.

What Are The Financial Benefits Of Buying Solar Projects? 

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

  • Tax credits: a dollar-for-dollar reduction in the amount of taxes you owe. The Government lets you deduct a certain percentage of solar investment costs from your federal taxes. 
  • 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 time, reducing your taxable income and saving money on your state and federal taxes.
  • Income stream: solar projects that qualify for advantaged tax treatment also typically include 15-25 year income streams tied to the energy produced by the project. 

You can read more about depreciation here and the benefits of solar tax credits here.  In the meantime, let’s jump into a case study to illustrate the potential financial benefits from a flip partnership 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 $1,257,500 in federal taxes and California taxes at the end of the year, leaving the couple with 1,242,500

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

Specifically, imagine that they choose to invest $600,000 in a flip partnership solar project this year. As a result, the family could reduce their tax bill in 2023 from $1,257,500 to up to $535,918 and also reduce it by up to $196,834 more in the following 5 years. 

Let’s now see the numbers:

Situation Overview:

  • Income: $2,500,000 in 2023
  • Expected taxes without solar benefits: $1,257,500

Solar Impact:

  • Investment: $600,000
  • Tax Savings: up to $918,416


Total tax savings: As a result of their investment, the couple’s total tax bill will come down from $1,257,500 to $339,084. That’s a total reduction in federal and state taxes of up to $918,416, or 153% of the $700,000 investment.

  • Tax Credits: $374,220 in tax savings in the first year, or 62% of the initial investment
  • Depreciation: $544,196 in tax savings, or 91% of the initial investment. (About 64% of this depreciation credit is available in year 1, and the remainder will be spread over the following 5 years, as you can see in the next table)

Year-by-Year Tax Savings:

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

Total Income: $30,000. While they will receive some income distributions over the early years, the lion’s share of the project revenue will go to their investment partners as a result of the flip partnership structure. See our guide to solar flip partnerships for more information.

Phantom income tax: -$76,800 Phantom income occurs when an individual is taxed on the value of their stake in a partnership (or another equivalent agreement), even if they do not receive any cash benefits or compensation. 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 in the case of most solar flip partnerships being used to pay down partnership debt, the partner may still owe tax on the full $10,000. As a result, the couple is taxed on income they never receive or “phantom income”, in this case, for a total of -$76,800.

What if Carl and Mia chose not to purchase a solar project?

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 as if the family doesn’t put $600,000 into the solar project, they would owe more than that in taxes and be sending the $600,000 in solar investments to the IRS.

Situation Overview:

  • Tax bill: $1,257,500
  • Amount not invested in solar: $600,000
  • Missed Tax Savings from Solar: $918,416
  • Net Loss: -$318,416


If Carl and Mia chose to pay their taxes instead of purchasing a solar project, they would owe that full tax bill of $1,257,500. Compare that to the additional $318,416 they would gain in tax savings from the flip partnership ($918,416 in tax savings – $600,000 in the cost of the solar investment). 

(The couple also could have earned a different type of return, focused more on ongoing income and less on up-front tax savings, via a “sale leaseback” You can read more about the various solar structures here). Hopefully, the benefits from 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.

Depreciation and Tax Credit Cap

For individuals earning active 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 $1,651,758, which is the net value between their $2,500,000 income and their $848,232 savings from federal depreciation (federal tax savings from depreciation in 2023 are $313,846 and assuming a 37% federal tax bracket, Carl and his wife’s saving from depreciation would then be $848,232). Their income would fall into the 37% federal income tax bracket, so their federal income taxes would be around $611,154. The couple could write-off up to $458,365 in year 1 from tax credits (75% of $611,154 for the current tax year, so in this case, they could write-off all $374,220 of their tax credits from the flip partnership 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 project 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. You can also read our Active Participation article to understand all the requirements, regulations and activities involved.


Investing in solar projects can help people reduce their active business income taxes. 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? It’s relatively simple: Valur has partnered with nationally recognized accounting and investment firms to facilitate investments into solar projects. We will help you identify the opportunity and choose between different solar investment 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!