The Power of Solar Tax Equity

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By Ryan Dings

Making an equity investment in Sunwealth’s Solar Impact Fund has many benefits, the most valuable of which are the tax benefits that are provided to each investor. Hence, such equity investments in solar are commonly referred to as Tax Equity, because an investor’s financial return in a tax equity investment is a combination of cash, federal tax credits and tax-deductible depreciation.

Tax Equity is certainly unique.  By investing in eligible solar projects, Tax Equity allows investors to turn a tax liability (i.e., your tax bill) into an investment opportunity.

Since tax benefits constitute a portion of the investor’s return, it is imperative that the investor have tax liability against which to apply the tax benefits.  Not all tax liability, however, is eligible for offset by the solar investment tax credit. The IRS rules require that individual investors (and entities like partnerships that utilize pass-through taxation) only apply the tax benefits from solar investment against the investor’s tax liability arising from passive income. Certain corporate investors (such as C-Corporations) have more leeway, and the IRS rules permit the tax benefits from solar to offset tax liability from the corporation’s normal business operations.

In other words, if you are an individual and have notable tax liability arising from passive income, then a Tax Equity investment could be an excellent way to reduce, if not eliminate, your tax bill and generate cash.

Here’s how it works:

  • The solar projects in Sunwealth’s Solar Impact Fund produce a thirty percent (30%) investment tax credit and allow for one hundred percent (100%) depreciation of the asset in the first year of operation.

  • Tax Equity investors make an investment in the Solar Impact Fund that is sized to their corresponding anticipated tax liability. Within the first year of their investment, receive approximately eighty percent (80%) of the capital back in the form of tax credits and tax-deductible depreciation (which is why having the tax liability against which the tax benefits can be directly applied is critical to making this investment a success).

  • Unused tax credits or tax-deductible depreciation in the first year may be carried forward by the investor and used to offset tax liability in future years. In addition, the tax-deductible depreciation may be used to reduce or eliminate state income taxes in the first year and subsequent years.

  • With their tax bill reduced or eliminated, the tax equity investor continues to enjoy a preferred cash return each year for 5 years. You’ve turned a tax bill into a cash flow stream.  

  • Then, after 5 years, the Tax Equity investor receives a cash buyout of the equity interest.

For the investor who is stuck with a large tax bill and no way to offset it, Tax Equity’s unique combination of tax benefits and cash create a meaningful return, which, on a risk-adjusted basis, can be very valuable in today’s volatile market.

Interested in learning more about Tax Equity? Contact the Sunwealth team to discuss the details of a Tax Equity investment.

Ryan Dings