Demonstrating Environmental Leadership: The Corporate Tax Equity Investor
By Ryan Dings
Businesses of all shapes and sizes are looking to do more to embrace sustainability and combat climate change. Many businesses procure renewable energy for their buildings, support EV fleets, and promote energy efficiency in their buildings – all very good things. But if your business is a profitable, widely-held corporation, then there’s a way you can make an even more meaningful environmental impact and generate a return for doing so: Make an investment in Solar Tax Equity.
Tax Equity is the fuel which makes the solar market go. The federal investment tax credit, which is regulated by the Internal Revenue Code, provides a strong incentive to invest in solar and creates the right project economics to make many solar projects – especially in the commercial solar sector – come to life. Let’s start with the brief solar tax equity refresher:
Tax Equity is a passive investment in a solar project that generates a financial return which includes both tax benefits and cash. The cash return is generated by the sale of power produced and sold by the solar project to the power purchaser; it is very predictable and low risk. The tax benefits include tax credits and tax-deductible depreciation, which are generated when the projects are placed into operation and can be used by the investors to reduce or eliminate tax liability. Hence, whether the investor is an individual or a corporation, it is imperative that the investor have a tax liability which can be offset by the tax benefits in order to make the most of a tax equity investment.
Individuals are limited to using the tax benefits to offset tax liability arising from passive income. An individual cannot use the tax benefits to offset taxes on active income (such as salary or wages) or portfolio income (such as trading stock and bonds). Widely held corporations, however, have no such limitation, and the tax benefits can be used to offset the tax liability that results from normal business operations.
In other words, profitable, widely-held, corporations could avoid paying federal taxes by investing in Tax Equity, which begs the question: Why aren’t more corporations investing in tax equity?
There is no shortage of corporations that have taxable income. In an age when more and more leadership is expected from corporations in the areas of social and environmental responsibility, Tax Equity gives corporations the opportunity to use their tax dollars in demonstrate environmental leadership to their employees, shareholders, customers and community.
The environmental leadership shown through tax equity investing is incredibly meaningful, especially when made in the commercial solar sector: Tax Equity drives debt investment, creates jobs, decentralizes and decarbonizes infrastructure and in many cases delivers energy savings to the power purchasers.
The solar projects benefitting from Tax Equity could be on the rooftops of buildings in the corporation’s own community, or across the country. Wherever the projects are located, the corporation can create meaningful environmental benefit and financial return.
For corporate investors, Tax Equity requires effort, from underwriting the investment to ensuring compliance. It is, however, becoming much easier as processes and documentation standardize. Moreover, the hard work is more than rewarded in the return on investment. A well-honed Tax Equity strategy can return a double-digit after-tax IRR for a corporate investor.
Solar investment may not be a corporation’s business. But environmental and social responsibility is increasingly becoming the business of every corporation. And doing a Tax Equity deal does not mean doing it alone. It means working with the right partner – just like Sunwealth – who can expertly manage the financing, development, and operation of the project.
Risks exist, the most notable of which is the potential recapture of tax credits. Although the tax credits can be applied immediately to offset tax liability, the credits are subject to “recapture” if the system does not remain operational for 5 years. Such risks, however, can be ameliorated and managed, by thoughtful management and careful underwriting of the buildings where commercial solar projects are located.
And then, there is the risk of doing nothing, which impact not just corporations, but all of us.
Given the urgency of climate change, and the massive societal benefits that will result from a shift to a clean energy economy, a thoughtful tax equity strategy should be a part of every corporation’s (and eligible individual investor’s) financial plans and can ignite the transition to a clean energy economy.