This might be one of the world’s best-kept secrets – but it IS possible for you to decrease your individual income tax liability, even retroactively, with the help of commercial solar project purchases. You can do this regardless of whether you are a W-2 wage earner, self-employed, or a business owner; all you need is high tax liability.
Green is In, but Not for Your Roof
I’m sure you’ve heard about the various tax benefits of environmentally friendly purchases, such as tax breaks for buying electric cars or installing solar panels on the roof of your home.
These purchases will give you a small tax credit – i.e., the IRS will refund a portion of what you paid for the vehicle or panels.
In the end, there is no return on investment – just a discount.
What if I told you there was a way for high-net-worth individuals and high-income earners (no matter their source of income – W-2, K-1, 1099, capital gains or business income) to make a solar purchase and receive a tax benefit higher than their initial purchase price? An actual return on investment?
Not only is this true, but the government and the IRS want you to make this purchase and get the tax reduction. They are offering incentives in the form of tax credits & tax deductions. There’s even passive income thrown in.
These solar projects are not going to sit on top of your roof.
Instead, they will be providing electricity to all types of commercial customers nationwide (i.e., schools, places of worship, or any for-profit business).
The business gets electricity, and you get a powerful tax reduction strategy in exchange for funding the solar projects.
Why is the Government Offering Tax Benefits for the Purchase of Solar Assets?
Many countries want to seem green and produce more electricity via renewable sources, such as wind or solar.
Unfortunately, the purchase of solar panels is like the purchase of an average car. I’m sure you’ve heard the old saying that a car depreciates in value as soon as you drive it off the lot.
The same can be said for solar assets.
Solar assets depreciate, must be insured, must be maintained & cleaned, they take up real estate, lose value after purchase, and, most importantly, generate a relatively low amount of income because electricity is cheap. This means that, without the tax incentives, if you wanted to buy solar panels to provide electricity to a third party as an investment, it would take a considerable amount of time for you to break even and start making money. In the meantime, a lot of your cash would be tied up in the purchase of the panels.
Enter the government.
By providing powerful tax benefits, such as depreciation and Investment Tax Credits (ITC), ranging from 30% all the way to 70%, it is now worthwhile for a high-income earner to acquire solar projects in lieu of making a tax payment, then use the tax benefits generated from that acquisition to pay for the tax liability. The benefits generated that same year are ultimately higher than the cash amount used to acquire the solar projects.
With the Inflation Reduction Act (IRA), the government has earmarked hundreds of billions of dollars to help the private sector convert to renewable energy. High-income individuals can benefit directly from the clean energy movement. Multi-billion-dollar corporations have enjoyed these tax benefits for many years, but now individuals can make green energy purchases and generate those significant tax benefits just like the big companies.
There is no longer a need to wait years for a return of capital on an investment, as the ITC and 80% of Federal Depreciation are claimed by the individual taxpayer and provide a full return of capital in Year 1!
This is clearly a win-win-win-win for the individual, the commercial customer, the government, and the environment. The high-earning individual gets to use the tax benefits, the country gets to increase green energy usage percentages without depleting its resources, the commercial and/or nonprofit customer receives cheaper and cleaner electricity, and the environment is less polluted.
Moreover, there is no catch. This is it.
Inflation Reduction Act Made Solar Very Profitable
One of the main benefits of a solar acquisition is the ITC that can be used in the year the solar project is placed in service. The ITC was set to be phased out from 30% to 10% in projects where construction began on or after January 1st, 2022. But when the Biden administration took office, it initially extended 26% ITC and, in 2022, the passing of the Inflation Reduction Act (IRA) raised the ITC backup to 30% and extended for a minimum of 10 years.
The IRA also added provisions that increase the ITC based on certain parameters to as high as 70%. The amount of ITC you receive depends on several factors, including where the solar components were manufactured and the location of those projects (among other factors).
Along with the ITC, you are also allowed to take 80% bonus depreciation on the purchase of solar panels (remember that the panels depreciate? This is like accelerating the speed in which you can write off the depreciation on your tax return).
All this makes it possible for that ROI mentioned above.
In addition to all the tax-driven benefits, you will also receive payments from commercial and non-profit customers for the sale of electricity for the duration of the solar project (project duration is anywhere between 6 and 35 years). This makes the purchase of solar a viable alternative to the purchase of rental homes and dealing with tenants or property management companies, for those who want passive income. It can also constitute a source of passive income during retirement.
Did I mention you can have any high source of income to participate in this strategy, including just a W-2? This is because the strategy helps lower individual income tax liability.
Who Benefits?
You need hefty tax liability for this type of purchase to make sense. An Adjusted Gross Income (AGI) of $500,000-$600,000 and up is suggested for the project to be feasible timewise and benefit-wise.
Why?
There is a limit to how much ITC you can claim on a tax return in any given year, and there are also project minimums.
Additionally, there are other criteria that must be met, which is why you absolutely need to consult a specialist before moving forward with this strategy.
Current, Future and Retroactive Income Tax Eraser
ITC is a very beneficial tax credit. If you have too much of it to be used up in a single tax year, it can be carried up to 22 years forward, or, thanks to the Inflation Reduction Act of 2022, up to 3 years back.
Say you had very high income tax liability in 2022, or even 2021. What if you received a huge one-time bonus at work, or sold a business, triggering high capital gains tax? Usually in these situations, the tax you paid in previous years is set in stone – there’s often nothing you can do to receive a refund for past taxes today.
Unless you have enough ITC to carry it back to previous years.
If the solar project you purchase is large enough, and, after using up all your ITC in the current tax year you still have some left over, you can choose to carry it forward to the following tax year, or to carry it back to a previous tax year. If you qualify, you can amend a previous tax return and receive a refund for taxes paid in previous years.
This is one of the only ways an individual can retroactively lower tax liability.
Is This an Investment?
Every purchase comes with risk.
That being said, a solar asset purchase is not the same as an investment, at least not in the way we typically view investments. Instead, this is a tax planning strategy that also provides cash flow.
Let’s say you invest in a single-family home for the purpose of renting it. You may receive some income from your tenants, and the home may appreciate over the years, which will lead to a profit for you when you sell the home. On the other hand, the country may also be hit by a recession (or a depression!), and your property value can drop, causing a loss for the investor.
This is because investment outcomes are never certain and are dictated by various market forces.
In the case of most tax reduction strategies, including a solar asset purchase, the benefit is the result of tax regulations, and not market forces. Tax law is not dictated by a stock or the real estate market doing well (at least, not to the same extent).
Additionally, if your benefit comes in the form of tax credits and/or tax deductions, these are not considered income to you, therefore not subject to capital gains or income taxes, or any other types of tax (passive income or cash flow from the sale of electricity is an exception).
Summary
I barely scratched the surface of the solar purchase tax reduction strategy in this article; there are very many moving parts. The strategy is extremely complex. It is precisely due to this extreme complexity that the strategy is a well-kept secret, certainly not spoken of enough given all the environmental benefits and tax reduction it offers.
High-income earners who qualify and participate in solar energy projects can expect a great return of investment, with most benefits in the form of ITC and depreciation in Year 1. There is no long wait to recoup funds. There is also the possibility of passive income in the form of annual payments made by the commercial and/or non-profit customers on the sale of electricity generated by those solar projects.
Some high-income earners in 2023 may have only two choices: make a solar purchase and save on taxes or do nothing – and pay your tax bill.
- Participation in a solar energy project can help high-income earners lower individual income tax liability, no matter the source of income.
- Main benefits include Investment Tax Credits (ITC), depreciation and cash flow from the sale of electricity.
- ITC can be carried 22 years forward or 3 years back.
- ROI in the form of income tax breaks expected in Year 1.
Disclaimer: Please note that this article is for informational purposes only, and not meant to serve as tax advice. Not everyone will qualify to participate in the strategy, and results are not guaranteed. You must consult a tax reduction or ITC specialist before making a purchase.