Solar Projects: A Tax Strategy For High-Income Earners

Benefits for tax-exempt organizations

Most organizations we work with are tax-exempt and cannot take advantage of the federal Investment Tax Credit (ITC) for a solar project. This has allowed third-party financing to help nonprofits realize a savings by involving a tax-savings motivated investor in its solar project. This has been the basis of SDC’s business for the past few years.

That all changed with the Inflation Reduction Act of 2022. The IRA lets nonprofits, schools, HOAs, etc., file tax returns and receive the 30% ITC as a direct refund payment. But that may be changing. Many tax-exempt organizations are deciding not to file a tax return due to registration complexities, refund delays, and potential changes to the direct pay program.

These entities can still achieve their solar goals through our third-party financing. SDC continues to be a proud partner of contractors that install clean, cost-efficient, green energy for non-profits.

A couple of examples of successful projects include helping to bring a 331-panel 149kW-DC system to the Winsor School project in Boston and a 16 kW of solar-generated electricity to Skyline Church of Oakland. These are only two out of the 230 projects SDC has financed.

As an investor, you can feel good that investing in nonprofit solar projects will not only save you tax dollars. Your participation will have a bottom-line impact on a nonprofit's operating budget for the next 25 years.

Since solar customers prepay 20 years of energy, and that prepayment is used on your behalf to pay construction milestone payments, investors don't take on development, construction, or credit risks.

Investor federal & state tax benefits

Federal taxes are the most significant financial component of personal taxes. Investing in solar energy may make you eligible for certain tax benefits, such as depreciation and energy tax credits.

Investment Tax Credit (ITC)

The U.S. Solar Investment Tax Credit (ITC), originally introduced as part of the Energy Policy Act of 2005, which was formally established into law in 2006, set the federal investment tax credit to 30%.

The ITC was extended several times over multiple Presidential administrations. The latest, prior to the IRA, was the 2020 COVID-19 extender, which froze the declining ITC at 26% for two extra years before resuming the decrease to 22% in 2023 and 10% in 2024.

Currently, the energy security provisions of the Inflation Reduction Act of 2022, signed into law on August 16, 2022, raised the ITC for commercial and residential solar to 30% in 2023.

The tax credit will remain at 30% for ten years. After that, it will decrease to 26% in 2033 and 22% in 2034.

Depreciation

Depreciation measures how long a business asset will remain "useful." This measure will determine how many years you can deduct the cost of that asset from your taxable income.

The government allows tax benefits based on how long a business asset will remain in use for an organization. In this case, that business asset would be your solar investment.

This benefit from solar investing includes MACRS depreciation at the federal level and 5-year depreciation in taxable states. The latter is particularly beneficial to investors who reside in California.

*There is pending legislation in Congress that may bring back bonus depreciation. This will enhance the first-year tax benefit.

Passive rules

Solar investments are passive by code. However, SDC helps show how the investor may demonstrate material participation and allow the solar benefits to be applied to their non-passive income.

Many tax benefit strategies require close involvement and time. However, SDC’s combination of the purchase structure, the contractual obligations, and logging 100 hours provides a good measure of being materially active in your business of generating solar energy for the non-profit. 

Upside income

With SDC, you can invest your saved taxes in other areas of investment interest, including other renewable energy developments, to use dollars that would have been lost to simply paying taxes.

The IRA of 2022 substantially increases the time horizon for solar investment opportunities. Since solar energy represents less than 4% of annual energy production in the United States, there is much room for growth.

By investing in solar projects, you’ll help the world move toward cleaner energy and set up a tax strategy that can save you tens of thousands of dollars in taxes.

SDC has been working with private investors for more than 15 years. In that time, we’ve helped thousands of people reap the tax benefits of investing in solar energy.

Please set a time to meet with me if you are a high-income earner with a tax liability of $500,000 or more. I will walk you through a detailed cash flow model that shows six-figure savings. We have active solar projects right now.