Tax equity investing is a financial strategy commonly used in the renewable energy industry, primarily in the United States. It involves the allocation of tax benefits, such as tax credits and depreciation, from a project or business to external investors in exchange for capital. This arrangement is typically used to finance projects that have significant upfront capital costs and substantial tax incentives, such as solar and wind energy projects.

Investment tax credits are used to reduce your Federal tax liability dollar for dollar. One dollar of tax credits offsets your tax bill one dollar. The US Government uses tax credits to encourage investment , and current tax code provides renewable energy project developers tax credits and accelerated depreciation which they use to monetize projects by selling these to investors.

A solar project developer, for example, will package the investment tax credits, depreciation, and preferred cash payment and sell this to an investor. The developer has no present use for the tax benefits, but the investor can use all the benefits to shield passive income from taxation. The developer raises the capital they need to build the project, and the investor saves taxes and earns a healthy return.

Tax equity refers to an investor providing capital to a renewable energy project in return for partnership interest in the project. Once the investor earns their expected yield, there is an exit. The timeframe is about 5 years to avoid any recapture risk.

Another way for an investor to get a tax shield is simply to buy and transfer only the investment tax credits directly. This is a one time transaction and there is no holding period, the investor buys the ITC at a discount and applies them to their tax liability. An example would be buying and ITC for $0.88 and this would reduce their tax bill $1.00. It is a quick return on investment.

We have extensive experience in renewable energy project financing and development, and our clients can use this expertise to construct a very beneficial tax strategy. One has to pay their taxes, but the IRS lets them move some of this tax payment and invest it instead. You satisfy your tax bill and earn a return instead of just writing a check to the IRS.