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Solar Investment Tax Credits

Govenment incentives for clean energy development

Today, renewables make up 17% of US capacity, but are expected to make up 25% in 2025 and 64% in 2050

$5-10 Trillion of capital is required to meet future projections for renewable energy capacity needs

37 states have current mandates or goals to increase sustainable renewable power generation

Data provided by
US Energy Information Administration, Bloomberg NEF
Blue Light

Clean Energy Investment Tax Credits

The Inflation Reduction Act provided a 30% tax credit for qualifying investments in renewable energy projects through the end of 2032.  The amount of the credit is determined as a percentage of the taxpayer’s basis in eligible property.

Developers of solar projects often provide opportunities for investors to enter partnerships to receive tax credits, depreciation and other benefits such as income.

Zero Leverage Example:

Solar Development Cost        $10,000,000

Solar Tax Credit                                        30%

Economic Incentive                  $ 3,000,000

60% Leverage Example:

Equity                                         $ 4,000,000  

Debt                                            $ 6,000,000

Solar Development Cost        $10,000,000

Economic Incentive                 $ 3,000,000

% of Invested Equity                                75%

Credit per $100,000 invested       $75.000

Tax Credits are one of the most powerful tax incentives available as they reflect not a deduction, but a dollar per dollar payment of tax liabilities owed.

Investors in solar development partnerships may have other significant benefits in addition to tax credits such as allocation of depreciation and income from power purchase agreements.

Solar Panel Roof

Bonus Depreciation allows for the deduction of certain asset costs in the year the property is placed in service.  In 2024, the maximum amount of Bonus Depreciation was 60%.  Without changes in legislation, this amount decreases over time, with the maximum amount falling to 40% in 2025, 20% in 2026 and 0% begining in 2027.

HYPOTHETICAL ILLUSTRATION

This illustration is for hypothetical purposes only and does not represent an actual program or offering for investment.  Assumptions include a $400,000 target income with $100,000 investment.  In this scenario, the solar program generated $179,200 of accelerated depreciation in the first year, thus reducing the Adjusted Gross Income (AGI) to $220,800.  A 37% federal tax liability of $81,696 was offset by $80,000 in solar tax credits, leaving a remaining balance of $1,696.  The 12% state tax reduced to $26,496 by the lowered AGI.  In this example, the state and federal tax owed after the solar tax benefits is $28,192.  Accounting for the total tax savings of $167,808 and original investment of $100,000, the first-year net benefit savings is $67,808 or 68%. Additional depreciation would be anticipated in future years with potential for income and an exit buyout.

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Programs typically target residual benefits in Years 2-5 with anticipated remaining depreciation, modest income and a potential buyout or flip-out in Years 5 or 6.  The hypothetical target returns below reflect potential benefits per $1 invested over the entire hold period.  This scenario would produce a $1.94 return on investment, or a net benefit of $0.94 over the entire period.  It is important to note that benefits received may create a capital account deficit, which would trigger a recapture tax.

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If the investor does not qualify as a Material Participant in the ownership of the property, then tax benefits described would only have the ability to offset passive income or gains.  Investors must be material participants in order to offset ordinary and other types of active income.

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