Solar Asset Purchase Tax Benefits: Everything You Need To Know

Last Updated on September 22, 2023

On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. As a result of the new law, the federal government will make the single largest investment in climate and energy in American history, providing an estimated $369 billion in tax incentives to shift America’s energy dependance towards renewable energy. 

For Americans with large tax bills coming from salary, bonuses, business income or even equity, this new bill provides an incredible opportunity for them to buy green-energy projects such as solar, take advantage of the tax saving opportunities available and offset hundreds of thousands of dollars in business profits or W-2 income and earn you a nice income stream on the side

Key takeaways

• The Inflation Reduction Act offers benefits for individuals looking to purchase qualified solar projects, including:
  • Investment tax credits: a dollar-for-dollar reduction in the amount of taxes owed.
  • Depreciation: a deduction for the amount of the value an asset loses over time.
  • Income Stream: solar projects typically include 15-25 year income streams tied to the energy produced by the project.
• There are some constraints on income tax write-offs, including a depreciation cap and an “active participation” requirement for some cases in particular

What Benefits Does The IRA Provide For Solar Projects?

The Inflation Reduction Act offers a couple of specific tax benefits for qualified solar businesses.

Investment Tax Credits (ITC)

A tax credit is a dollar-for-dollar reduction in the amount of taxes you owe. For example, if you owe $1,000 in taxes and you have a $500 tax credit, your tax liability would be reduced to $500. Investment tax credits are a federal tax incentive for business investments. They let individuals or businesses deduct a certain percentage of their investment from their taxes.

The IRA provides for significant tax credits in return for investment in certain specific solar programs. Tax credits begin at 30% of the project investment and could go as high as 70% (and depending on the solar project structure you choose, your tax credits could even exceed 100% of your investment). 

Importantly, these bonus credits apply only to projects that start construction in 2023 or later, so make sure you know the features of the project you are buying in. But don’t worry, Valur works with accounting and legal partners to qualify these investments. 

Depreciation

Depreciation is the amount of value that a physical asset loses over time. From a tax standpoint, depreciation is relevant because you may be able to take a deduction for the amount of the value an asset loses over time, reducing your taxable income and saving money on your taxes. The concept of depreciation allows investors in physical assets to claim a tax deduction to reflect wear and tear on those assets over time. 

Let’s say you have a $2 million income and would owe $750,000 in federal taxes. (We’ll ignore state taxes here.) If you had $800,000 in depreciation, you would be able to use that depreciation to write off $800,000 of income, leaving you at $1.2 million of taxable income. As a result, you would owe only ~$440k in federal taxes, a savings of up to $330,000, not including potential state tax savings (and federal tax credits)!

Income Stream

Solar projects that qualify for advantaged tax treatment under the IRA typically include 15-25 year income streams tied to the 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 between 3-7% annually of your investment. 

Qualifications & Constraints On Income Tax Write-offs

Benefits from solar projects are now clear, but there are a couple of qualifications and limitations that investors should take into account.

Depreciation And Tax Credit Cap

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 for earned income such as salary i.e. non business income. However, if you have excess depreciation, you can roll them forward and apply them in future tax years. Critically, for corporations or if you have active or passive business income, there is no limit to your depreciation write-off.

In addition, there is a 75% tax credit limitation to the amount of tax credits you can apply in a given year 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 20 years.

Active Participation Requirement

To qualify for the tax-credit portion of the IRA’s solar program, depending on your situation,  you will have to actively participate in the project, and this will depend on whether you have active business income, ordinary income, RSUs or if you have passive business or C corporation income.

If you are in the first bucket of options,  you will need to set up an LLC focused on solar projects and you will also need to actively participate in the solar business and spend an amount of annual hours in the project. This is a bit tougher for many investors, but a couple of features make the requirement less onerous:

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

On the other hand, if you have passive business income and want to buy a solar project, you can also write off an unlimited amount of that income in tax credits and tax depreciation. In this case, you don’t need to be active in the solar business, which means you don’t have to spend any time on it.

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

How To Purchase Solar Projects

Speaking of which, 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 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. 

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.

Finally, to learn more you can schedule a call with us here.

Related Readings

• Solar Flip Partnership: An Advanced Renewable Energy Strategy
• Case Study: Solar Flip Partnership
• Case Study: Financial Benefits of Solar Project Purchases (2023)

About Valur

We built a platform to give everyone access to the tax and wealth building tools of the ultra-rich like Mark Zuckerberg and Phil Knight. 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 cos of competitors. From picking the best strategy to taking care of all the setup and ongoing overhead, we make it easy and have helped create more than $500m in wealth for our customers.