Reducing RSU Taxes With Solar Sale Leaseback Purchases – Case Study

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 to taxes! 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 with solar asset purchases. But first, a bit about general information about RSUs and solar tax benefits. 

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 the taxes from vested RSUs or ordinary 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:

• Tax credits: A dollar-for-dollar reduction in the amount of taxes you owe. The government lets you deduct a certain percentage of a solar project purchase 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 sale leaseback solar project.

RSU Case Study Walk-through

Aaron is an engineering manager at Snowflake, a data storage and analytics company. He joined the company in 2020, shortly before it went public, and his compensation has been a mix of salary and double-trigger RSUs. In 2023, Aaron will earn $600,000 in cash and vest $1,700,000 in RSUs. Because Snowflake is a public company, his RSUs vest on a set schedule, and he owes taxes on them in the year that they vest whether or not she sells them.

As a result, he’s looking federal and California taxes at the end of the year. After paying $1,156,900 in total taxes, that would leave him with $1,143,100 — an almost 50% haircut.

However, starting a solar business through a sale leaseback solar project could earn Aaron significant tax credits, depreciation deductions, and ongoing income to mitigate his high tax burden.

Specifically, imagine that the chooses to put $500,000 in solar projects this year. He can reduce his tax bill from $1,156,900 up to $836,670 in the first year, and in addition reduce his tax bills by up $76,880 in the following 5 years, and earn almost $500,000 in income over the next 20 years.

Situation Overview:

• Income: $2.3M
• Expected taxes without solar benefit: $1.156M

Solar impact:

• Investment: $500K
• Tax savings: up to $397K
• Income: $500K

Results:

• Total tax savings: Reduce federal and state taxes by up to $397,110 (79% of the $500,000 investment). This is money he otherwise would have lost to taxes.
  • Depreciation: $197,110 in tax savings, or 39% of the initial investment over the first six years with $120,230 of those tax savings coming in year one.
  • Tax Credits: $200,000 in tax savings in the first year, or 40% of the initial investment for this particular project

• Total Income: $500,000 (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 Aaron taking into account his 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 income distributions for 20 years add up to $897,110, none of which the family would have received without his solar project purchase.

What if Aaron Chose Not To Invest In Solar?

This is, of course, a common question: How would Aaron do if he simply paid his taxes and invested the remaining money? This is a pretty simple comparison. If Aaron doesn’t buy the solar project, he’ll be sending most of that money to the IRS. 

Situation Overview

• Tax bill: $1,156,900
• Amount not invested in solar: $500,000
• Missed Tax Savings & Income from Solar: up to $897,110

Return On Investment

If Aaron chose to pay his taxes instead of investing in solar, he would owe that full tax bill of $1,156,900. Compare that to the additional $397,110 he could gain in tax savings from the solar sale leaseback plus the $500,000 he would gain from income from the solar asset purchase. 

This is a 4.85x return on investment. Here is how we get there:

1. Consider $1 million of Aaron’s income. His tax bill on that amount without starting a solar business would have been about $500,000.
2. If he didn’t invest in solar, he’d have had $500,000 left come next April.
3. Instead, Aaron took the $500,000 that he would have paid to the government and invested it in a solar project that yields up to $397,110 in tax savings. He paid $500,000 for the solar project, and he’ll still owe $102,890 in taxes. As a result, at the end, out of the original $1 million, he’ll have $397,110 left (as compared to $500,000, after taxes, if he had not done the solar project purchase).
4. Accordingly, Aaron has $102,890 “at risk” — the difference between what he would have had in his bank account had he just paid his taxes ($500,000) and what he has in his account after the solar purchase + tax savings ($397,110).
5. Now consider the future benefits of Aaron’s solar project: $500,000 in total revenue over the life of the project (20 years). That is more an 4.85x return on Aaron’s at-risk capital. Not bad for a pot of money that would otherwise have gone to the tax collector.

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

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 $136,620 which is below the cap of a an 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 Aaron´s example, his federal taxable income would be $2,011,000, which is the net value between his $2,300,000 income and his $289,000 savings from depreciation ($106,930 tax savings from depreciation in 2023 are Federal and assuming a 37% federal tax bracket, Aaron’s saving from depreciation would then be $289,000). His income would fall into the 37% federal income tax bracket as seen in this article and his federal income taxes would be around $744,070. Aaron could write-off up to $558,052 in year 1 (75% of $744,070 for the current tax year, so in this case, he could write-off all $200,000 of his tax credits from the sales leaseback project and could invest more to increase his tax savings and returns!)

Active Participation Requirement

To qualify for the tax-credit portion of the IRA’s solar program, Aaron will have have material participation in business. He will need to set up an LLC business focused on solar projects and he will also need to materially participate in the solar business. This is a bit tougher for many investors, but a couple of features make the requirement less onerous:

• Activities like visiting the solar site work are important 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 employees with high ordinary income to mitigate taxes and offset a large part of the tax he 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 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.

Related Readings

• Case Study: Solar Flip Partnership
• Simplifying Solar Investments
• Solar Flip Partnership: An Advanced Renewable Energy Strategy

About Valur

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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!