Reducing RSU Taxes With Solar Flip Partnership Purchases • Learn with Valur

RSUs are great. If you work for a late stage startup that is still private, you typically get shares but they don’t vest (and cause you to owe taxes) until the company gets acquired or goes public. And if your company is already public, RSUs are really just liquid compensation in the form of stock.

The downside is RSUs are taxed as ordinary income which means you may lose more than 50% of their value when they vest! Fortunately we have a solution to mitigate these taxes: you can offset almost 100% of the tax you would otherwise owe when you vest or sell your RSUs with solar asset purchases.

In this article, we’ll dig into a case study to explain how that would work and how you can reduce RSU taxes by starting a solar business. But first, a bit about general information about RSUs and solar tax benefits.

Key takeaways:

RSUs can result in significant taxes, but buying solar projects can help employees with high ordinary income offset a large part of the tax they would otherwise owe, maximizing the value of their RSUs.
Purchasing solar projects through a flip partnership offers financial benefits including tax credits that provide a dollar-for-dollar reduction in taxes owed and depreciation deductions that reduce taxable income over time.

How Do RSUs Work?

Restricted Stock Units, or RSUs, are a type of equity compensation that public and late-stage private companies use to incentivize and reward employees. An RSU represents the right to a share of the company’s stock. RSUs typically vest over a period of time and once they vest, the employee receives the company shares.

Most RSUs in private companies today are subject to “double-trigger” vesting. Double-trigger RSUs vest only on two conditions: after the vesting date has passed and after a liquidity event, like an acquisition or initial public offering. By delaying vesting until the shares become liquid, employees are able to delay their often substantial tax bill until they actually receive real compensation.

RSUs can be an attractive form of compensation for employees but the resulting tax can significantly reduce the value. Solar project purchases help so this doesn’t have to be this way.

What Are The Financial Benefits Of Buying Solar Projects?

Buying qualified solar projects can substantially reduce taxes from vested RSUs. 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:

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.

RSU Case Study Walk-through

Priya is an engineering manager at Snowflake, a data storage and analytics company. She joined the company in 2020, shortly before it went public, and her compensation has been a mix of her salary and double-trigger RSUs. In 2023, Priya will earn $600,000 in cash and vest $400,000 in RSUs. Because Snowflake is a public company, her RSUs vest on a set schedule, and she owes taxes on them in the year that they vest whether or not she sells them.

As a result, Priya has a substantial tax bill: around $503,000 in federal and California taxes in 2023.

Purchasing a qualifying solar project, however, could earn Priya significant tax credits, depreciation deductions, and ongoing income to mitigate her high tax burden. Below, we’ll walk through how Priya can use a solar project to reduce her taxes in 2023.

Specifically, imagine that she chooses to invest $300,000 in a flip partnership solar project this year. As a result of this investment, she could reduce her tax bill in 2023 from $503,000 to up to $192,202 and also reduce it by up to $98,417 more in the following 5 years.

Let’s now see the numbers:

Situation Overview:

Income: $1,000,000 in 2023
Expected taxes without solar benefits: $503,000

Solar Impact:

Investment: $300,000
Tax Savings: up to $409,215

Results:

Total tax savings: As a result, her total tax bill will come down from $503,000 to up to $93,785. That’s a total reduction in federal and state taxes of up to $409,215, or 136% of the $300,000 investment.

Tax Credits: $187,110 in tax savings in the first year, or 62% of the initial investment
Depreciation: $222,105 in tax savings, or 74% of the initial investment. (About 56% 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 Priya 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: $15,000. While Priya will receive some income distributions over the early years, the lion’s share of the project revenue will go to her investment partners as a result of the flip partnership structure. See our guide to solar flip partnerships for more information.

Phantom income tax: -$38,400. 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, Priya is taxed on income she never receives or “phantom income”, in this case, for a total of -$38,400

What if Priya chose not to start a solar business?

This is, of course, a common question: How would Priya do if she simply paid her taxes and invested the remaining money? This is a pretty simple comparison as if Priya doesn’t invest $300,000 in the solar project, she would owe more than that in taxes and be sending $300,000 in solar investments to the IRS.

Situation Overview:

Tax bill: $503,000
Amount not invested in solar: $300,000
Missed Tax Savings from Solar: $409,215
Net Loss: -$109,215

Results

If Priya chose to pay her taxes instead of investing in solar, she would owe that full tax bill of $503,000. Compare that to the additional $109,215 she would gain in tax savings from the flip partnership investment ($409,215 in tax savings – $300,000 in the cost of the solar investment).

(Priya 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 investment structures here).

Hopefully, the benefits from solar investments 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 investor” and other regulatory requirements) here.

What Are The Depreciation And Tax Credit Constraints?

Depreciation will be capped for investors earning W-2 (i.e. salaried income) at $289,000 per individual per tax year, or $578,000 per couple per tax year if you are an active investor. However, if you have excess depreciation, you can roll it forward and apply it in future tax years. From the example and given per year results shown in the table above, depreciation in the first year would be $123,688, which is below the cap of a single individual per tax year.

In addition, you can only write-off 75% of your remaining federal tax liability with tax credits 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 Priya´s example, her federal taxable income would be $711,000, , which is the net value between her $1,000,000 income and her $289,000 savings from federal depreciation (tax savings from depreciation in year 1 are $106,930 and assuming a 37% federal tax bracket, Priya’s savings from depreciation would then be $289,000). Her income would fall into the 37% federal income tax bracket, so her federal income taxes would be around $263,070. She 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, they could write-off all $187,110 of her tax credits from the flip partnership and could invest more to increase her tax savings and returns!).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.

Active Participation Requirement

To qualify for the tax-credit portion of the IRA’s solar program, you will have to have material participation in business. You will need to set up an LLC focused on running your solar business and you will also need to actively participate with annual hours in your solar business. This is a bit tougher for many investors, but a couple of features make the requirement less onerous:

Activities like viewing site work (even if you are not an expert) and attending relevant conferences and educational seminars qualify for this hours requirement.
Participation by either spouse is counted toward satisfying the annual hours.
Valur streamlines your documentation process, enabling you to save relevant documents and log your participation hours directly on our platform.

You can also read our Active Participation article to understand all the requirements, regulations and activities involved.

Conclusion

Purchasing 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 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 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!