Solar panels are a great, environmentally friendly way to reduce your energy costs. There are many tax benefits to installing solar panels, some of which will be well in excess of your tax liability.
However, a small business cash flow doesn’t have to be an obstacle to going green. For small businesses looking to go solar, it makes sense to partner with a tax equity investor in solar.
What is Tax Equity Investment in Solar?
Solar tax equity is the process of investing in someone else’s solar panels to reap the tax benefits from the solar panel. Because tax equity investors in solar put money into the solar panel installation, they can claim part ownership and therefore the tax benefits.
In most solar tax equity structures, the tax equity investor will put in 40% of the purchase price of the solar panels in exchange for 100% of the tax benefits. Tax benefits vary, usually by state, but almost all of them provide benefits for 3rd party tax equity financing of solar projects.
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Solar tax equity investment is a win-win for both parties. The solar panel owner gets the benefits of reduced energy costs and discounted solar panels while the tax equity investor gets to write some of the value of the solar panel off of their taxes.
Tax Benefits of Investing in Solar
There are many benefits to investing in solar panels including environmental conservation and cost savings. But chief among these benefits for entities with large tax liabilities are the many tax benefits.
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Tax benefits for solar investment include both state and federal tax credits and other tax incentives. At the federal level, there are three benefits of tax equity in solar:
- The solar investment tax credit (ITC) – Currently standing at 26%, the solar investment tax credit provides a draw against your federal income tax liabilities equal to a portion of the solar panel’s purchase price. Download this PDF from the Department of Energy for more details.
- Bonus depreciation – Ordinarily, the IRS allows you to write off the cost of durable assets over their projected useful life. However, with the 2017 Tax Cuts and Jobs Act, you can reduce your taxable income by as much as 100% of the purchase price in the first year.
- MACRS accelerated depreciation – The Modified Accelerated Cost Recovery System (MACRS) allows you to deduct the cost of your solar panels over only five years. This is in comparison to the normal depreciation length of 20-25 years.
Many states offer additional tax incentives for installing and using solar panels. These include things like:
- Investment tax credits – In addition to the federal solar investment tax credit, many states offer their own tax credits.
- Energy production tax credits – Some states, in addition to net metering programs, allow solar panel owners to write off the value of the energy generated by your solar panels.
- Property tax exemptions – Because solar assets can increase the value of your property, some states allow you to write off the added value of the solar panels on your taxes.
- Sales tax exemptions – Some states allow purchasers of solar panels to avoid paying sales tax on them.
As you can see, there are many tax benefits to be had when purchasing solar.
Finding Tax Equity Investors in Solar
While it is technically possible to solicit a solar tax equity investor directly, this is more often done through a third party. There are numerous companies that operate solar tax equity funds. These funds provide a list of tax equity investors to businesses looking for tax equity financing
Not every solar tax equity fund is created equal, however. You will want to know what percentage of the solar investment the tax equity investor will pay, as well as the tax benefits you will be foregoing.
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There’s also a bit of a caveat. Tax law mandates that solar tax equity beneficiaries must be an operator of the company.
To deal with this, tax equity investors are brought on as a partner in a temporary paper business known as a project company. This is known as a partnership flip.
Partnership flips can be somewhat confusing, and you will likely need a good CFO or tax attorney to walk you through it. With fractional CFO services, a tax equity investment in renewable energy is within reach even for small businesses.
Tax Equity in Solar and Your CFO
Going green with solar panel installation is good for the environment and good for your bottom line. Your CFO should always be looking for ways to find savings for your business, and energy projects are a great investment to reduce long term costs.
|Not sure what tax equity investors are looking for when they enter into a partnership? Check out this list from Forbes for tax equity investors.|
Solar projects have investors waiting to write the cost off on their tax returns. Your CFO should be skilled in finding investors for project finance, and solar tax equity investors should be no different.
Many small business owners think CFOs are only for big businesses. As a result, they pay expensive retainers to tax attorneys to get them through the solar tax equity process. But with fraction CFO services like indinero, a knowledgeable CFO is within reach.
A fractional CFO works part time for a handful of companies, consulting anywhere from once a month to multiple times a week. This is an affordable option for businesses looking for the wisdom of a CFO without the cost of hiring a C-level officer.
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If you’re considering going solar with the help of a fractional CFO, indinero is here to help. Our fractional CFOs can help with accounting, tax preparation, budgeting, and strategy. When you’re ready to get started or want to know more, schedule a call with our experts today.