Harnessing the Power of Renewable Energy: A Savvy Tax Strategy for Corporations

As the world pivots towards sustainable energy solutions, corporations have significant financial advantages to participate in this transition. Renewable energy investments provide not just environmental benefits but also attractive tax incentives. With US corporate tax rates averaging 21%, these incentives can play a pivotal role in tax planning strategies.

Before we dive into how Corporations can reduce their tax liability with renewable energy, if you haven’t read through the basics of renewable energy & solar tax incentives here is our guide on the topic. Now let’s jump into it, here are three ways corporations can buy renewable energy products to lower their taxes!

Investment Tax Credits (ITCs)

Corporations can buy ITCs for renewable energy projects at approximately $0.9 per tax credit. This means that for every dollar of tax credits a company buys, it only spends $0.9, representing a 10% immediate savings. Importantly Corporations (and individuals) can only write off 75% of their tax liability with tax credits.

For example, if CorpX with a $10 million tax liability purchases $7.5 million in ITCs, the actual investment is ~$6,750,000, resulting in a net tax saving of $750,000.

Tax Equity “Flip” Partnerships

As a quick refresher on how do flip partnerships work, you can read in more detail here. The partnership is typically structured with three partners: a sponsor (the developer), an investor (you) and a bank that provides a loan. The sponsor partner is responsible for developing and operating the renewable energy project, the investor partner provides funding for the project, and the bank provides debt financing that increases the total investment in the project and the tax credits and depreciation available to you.

The flip partnership structure works by allocating most of the tax credits and depreciation — typically 99% of the tax benefits — to the investor partner in the early years of the project’s life. This can be particularly advantageous for the investor, as they can use these tax benefits to offset their taxable income. In return for these supercharged up-front tax benefits, the sponsor partner receives the majority of the cash flow from the project over its lifetime.

Flip Partnership Example

Let’s take a look at an example. Imagine the following allocation of cash invested in a qualified solar project:

• $10 million from the investor
• $10 million in loans from the banking partner.

Because this is a flip partnership the benefits will be split.

• Tax Benefits
  • Up to 99% of the benefits go to the investor for the first five years
  • 1% to the sponsor for the first five years
• Profit
  • First 5 years
    • 99% of the profit (after paying down the debt) for the first 5 years goes to the investor
    • 1% of the profit to the sponsor for the first 5 years
  • After 5 years
    • 5% of the profit after the first 5 years goes to the investor
    • 95% of the profit to the sponsor after the first 5 years

Using the schedule outlined above, the investor partner would receive **99% of the tax benefits for the entire $20 million dollar project.**This would mean credits and depreciation against $19.98 million of the solar investment, even though the investor only committed $10 million. The result would be more than $11.36 million of tax savings, or up to $1.136 million in tax savings plus some income beyond the investment! The split of the tax savings would be $8m from tax credits and $3.36m from depreciation.

Purchasing Solar Projects (also known as a Power Purchase Agreement)

Purchasing solar projects represents another investment strategy that both provides tax savings and generates higher amounts of income. This is a strategy that has been particularly popular for large tech companies like Google and Amazon etc.

Suppose a corporation purchases a solar project for $10 million. Let’s assume the project qualifies for a 40% federal tax credit and 80% bonus depreciation in the first year. This would result in an initial tax savings of roughly $5.68 million ($4 million from the tax credit and $1.68 million from depreciation, assuming a 21% corporate tax rate). In addition, the corporation could profits from selling the solar power generated or use the power itself to lower its cost.

Let’s assume the corporation sells the energy and is earning 6% of its investment/year in income or $600,000. Critically the company invested $10m, saved $5.68m in taxes. As a result the company is earning $600k with only $4.32m at risk after the tax savings or 13.9% return!

Conclusion

Renewable energy investments present corporations with an innovative way to lower their taxes. By purchasing investment tax credits, investing in tax equity partnerships, or directly buying solar projects, corporations can enjoy significant tax savings while supporting a sustainable future. If you are interested in learning more you can chat with our team here or look at our available solar projects and tax credits here.