Reducing RSU Taxes With Solar Investments

RSUs are great. If your company is still private, you typically get shares but they don’t vest and cause you to owe tax 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. Fortunately we have a solution to mitigate these taxes. As of January 1 of this year, you can offset as much as 100% of the tax you would otherwise owe when you vest or sell your RSUs with Solar investments (you can read more here).

We’ll dig into a case study to explain how that would work and how you can reduce RSU taxes with solar investments. But first, a bit about general information about RSUs and solar tax credits.

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, in short, 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.

When, exactly, the shares vest is critical, because RSUs are typically subject to ordinary income tax — at combined marginal federal and state rates of as much as 50% — at the time of vesting.

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. This double-conditional vesting structure is critical to the value of RSU compensation. By delaying vesting until the shares become liquid, employees are able to delay their often substantial tax bill until they actually receive real compensation.

The single-trigger RSU structure, by contrast, puts employees in private companies in a bit of a bind: If RSUs vest at a predetermined date, irrespective of whether they are liquid, the employee could be left with a large tax bill and no cash to pay it as they can’t sell the shares. Given this risk, single-trigger RSUs are all but extinct among private companies today (Carta is a notable exception); they are typically offered only by public companies — whose stock can be sold at any point.

RSUs can be an attractive form of compensation for employees. True, the resulting tax can complicate things significantly. But it doesn’t have to be this way.

What are investment tax credits?

Investment Tax Credits are tax incentives offered by the federal and state governments to encourage investment in certain privileged sectors, from real estate in low-income areas to renewable energy. These credits are an important policy tool for promoting socially valuable investments, and last year, Congress went all in: The 2022 Inflation Reduction Act (IRA) represents the largest investment in climate and energy in American history, providing at least $369 billion in tax incentives for green infrastructure. In particular, the IRA increased and extended previously available tax benefits — tax credits and depreciation — for specific renewable energy projects, including solar investments.

How can you reduce Reduce RSU taxes with solar investments?

The tax incentives available via investment in qualified solar projects can reduce the tax you owe on any earned income — salary, bonus, AMT, side hustle, business income, or, critically for our purposes here, RSUs. The financial benefits from qualified solar projects include federal credits, federal and state depreciation deductions, and a share of income from the project you invest in. The basic tax benefits of qualified solar infrastructure investments are massive, and we explain them in detail in our solar tax credits guide.

Now let’s take a look at an example.

Reduce RSU taxes with solar investment: Case study

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. Last year, Priya earned $500,000 in cash and vested $250,000 in RSUs. This year, those numbers have gone up a bit —her cash compensation will be $600,000, and she’ll vest $300,000 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 of these very strong earnings, Priya has a substantial tax bill: $235,000 in federal taxes, and another $74,000 in California state taxes in 2022 — a total of $309,000, or 41% of her total income. And in 2023, those numbers will be $291,000 and $92,000, for a total bill of $383,000, or 43% of her income.

An investment in 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 investment to reduce her taxes.

Specifically, imagine that she chooses to invest $381,000 in a “flip partnership” solar project this year. As a result of this investment, she could reduce her tax bill this year to $0 while also reducing her bill from last year by more than half. You can read more about the mechanics (including “active investor” and other regulatory requirements) here.

Situation Overview

• Income: $750,000 in 2022; $900,000 in 2023
• Expected taxes without solar benefits: $692,000
• Solar Impact:
  • Investment: $381,000
  • Tax Savings: $649,000

Results

• Total tax savings. As a result of her investment, her total tax bill over 2022 and 2023 will come down from $692,000 to around $43,000. That’s a total reduction in federal and state taxes of $649,000, or 170% of the $381,000 investment.
  • Tax Credits: $314,000 in tax savings in the first year, or 82% of the initial investment
  • Depreciation: $335,000 in tax savings, or 87% of the initial investment. (About 80% of this depreciation credit is available in year 1, and the remainder will be spread over the following 5 years.)
• Total Income: Negligible. 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.

What if Priya chose not to invest in solar?

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 the $381,000 in the solar project she would owe more than that in taxes and be sending the $381,000 in solar investments (+ $268,000) to the IRS.

Situation Overview

• Tax bill: $692,000
• Amount not invested in solar: $381,000
• Missed Tax Savings from Solar: $649,000
• Net Upfront Loss: -$268,000

Results

If Priya chose to pay her taxes instead of investing in solar, she would owe that full tax bill of $692,000.

Compare that to the additional $268,000 Priya would gain in tax savings from the flip partnership ($649,000 in tax savings – $381,000 in the cost of the solar investment) Priya would have netted with a solar investment. After 5 years this would turn into an additional ~$323,000 after reinvesting the savings that otherwise would have been lost to taxes.

Next Steps

If you are interested in learning more, schedule a time to chat with our team.

Related Readings

• Exploring Solar Investments in 2023
• Case Study: Financial Benefits of Solar Investments (2023)
• Solar Flip Partnership: An Advanced Renewable Energy Strategy

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