Case Study: Financial Benefits of Solar Sale Leaseback Purchases

Last Updated on January 9, 2024

Introduction

Green energy is having its moment. Electric cars are expected to represent 30% of all passenger vehicles on the road by 2030. And the Biden Administration and Congress has decided to go all in to incentivize investment in renewable resources such as solar.

The Inflation Reduction Act (IRA) is the single largest investment in climate and energy in American history, providing up to $369 billion in tax incentives for green infrastructure. In particular, the IRA increased and extended previously available tax benefits for specific renewable energy projects, including solar.

In this article, we’ll walk through an example of how a California couple is taking advantage by starting a renewable energy business and buying solar Sales-Leaseback assets, which provides an opportunity for them to reduce their taxable income and generate extra income at the same time (you can see examples of available solar assets here).

What Are The Financial Benefits of Buying Solar Projects? 

Buying qualified solar projects can substantially reduce the taxes from ordinary income, business income or passive 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: Offer a dollar-for-dollar reduction in the amount of federal taxes you owe. The government lets you deduct a certain percentage of a solar projects cost from your federal taxes in the first year.
• Depreciation: Are 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.

Earned Income Case Study Walk-through

Aaron is a married California resident with $2,300,000 in income in 2024, and, as a result, he’s looking at $870,000 in federal taxes and $265,000 in California taxes at the end of the year. After paying $1,135,000 in total taxes, that would leave him and his wife with $1,165,00 — an almost 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 $500,000 in solar projects this year. They could reduce their tax bill from $1,135,000 to $798,380 in the first year, and in addition reduce their tax bills by $72,880 in the following 5 years, and earn almost $500,000 in income over the next 20 years from the energy sold from the project.

Situation Overview:

• Income: $2.3M
• Expected taxes without solar benefit): $1.135M

Solar impact:

• Investment: $500K
• Tax savings: up to $409.5K
• Income: $500K

Results:

• Total tax savings: Reduce federal and state taxes by up to $409,500 (82% of the $500,000 investment). This is money the family otherwise would have lost to taxes.
  • Depreciation: $209,500 in tax savings, or 42% of the initial investment over the first six years with $136,620 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 typically include 20-25 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 potential 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 revenue distributions for 20 years add up to $909,500, none of which the family would have received without purchasing a solar project.

What If Aaron Chose Not To Buy Solar Assets?

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: $1,135,000
• Amount not invested in solar: $500,000
• Missed Potential Tax Savings & Income from Solar: up to $909,500

Return On His Purchase

If Aaron chose to pay his taxes instead of starting his solar business and buying the solar assets, he would owe that full tax bill of $1,135,000. Compare that to the additional $409,500 he would gain in tax savings from the solar sale leaseback plus the $500,000 he would gain in income from the solar project. 

This is a 5.52x return on his purchases of the solar assets. Here is how we get there:

1. Consider $1 million of Aaron’s income. His tax bill on that amount without the solar assets would have been about $500,000.
2. If he didn’t purchase solar assets, 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 bought a solar project that would yield up to $409,500 in tax savings. He paid $500,000 for the solar project, and he’ll still owe $90,500 in taxes. As a result, at the end of the year, out of the original $1 million, he’ll have $409,500 left (as compared to $500,000, after taxes, if he had not made the solar project purchase).
4. Accordingly, Aaron has $90,500 “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 + potential tax savings ($409,500).
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 than a 5x 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 “partnership flip.” 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?

Depreciation will be capped for investors earning W-2 (i.e. salaried income) at $305,000 per individual per tax year, or $610,000 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 married couple 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 $1,966,444, which is the net value between his $2,300,000 income and his $333,556 savings from depreciation (around 90% of the $136,620 tax savings from depreciation in 2024 are Federal and assuming a 37% federal tax bracket, Aaron and his wife’s saving from depreciation would then be $333,556). Their income would fall into the 37% federal income tax bracket as seen in this article, but as a result of the progressive tax system, not every dollar they earn will be taxed at that rate, so their federal income taxes would be $657,498. Aaron and his wife could write-off up to $493,124 in year 1 (75% of $657,498 for the current tax year, so in this case, they could write-off all $200,000 of their tax credits from the sales leaseback project and could invest more to increase their tax savings and returns!)

Active Participation Requirement

To qualify for the tax-credit portion of the IRA’s solar program, Aaron will have to have material participation in business. He will need to set up an LLC to run his solar business focused on solar projects and he will also need to materially participate in running the solar business by spending annual hours in it. 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 can 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

Buying solar projects can help employees with high ordinary 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 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.

Related Readings

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

About Valur

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