Case study:
Aaron is a married California resident with $2,300,000 in income in 2023. As a result, he’s looking at $870,000 in federal taxes and $265,000 in California taxes at the end of the year. After paying $1,135,000 in total taxes, that would leave him and his wife with $1,165,00 — an almost 50% haircut.
However, an investment in a qualifying solar project could earn the family significant tax credits, depreciation deductions, and ongoing income to mitigate their high tax burden. Specifically, imagine that the family chooses to invest $500,000 in solar projects this year, they can reduce their tax bill by more than $414,000 and earn almost $500,000 in income over time.
Situation Overview:
- Income: $2.3M
- Expected Taxes (w/o solar benefits): $1.135M
- Post-tax cash: $1.165M
- Solar Investment: $500,000
Results:
- Total tax savings: Reduce federal and state taxes by $414,500 (83% of the $500,000 investment). This is money the family otherwise would have lost to taxes.
- Tax Credits: $200,000 in tax savings in the first year, or 40% of the initial investment
- Depreciation: $214,500 in tax savings, or 43% of the initial investment over the first six years with $137,620 of those tax savings coming in year one.
- Total Income: $500,000 (5% of initial investment per year for 20 years).
Solar projects that qualify for advantaged tax treatment under the IRA typically include 15-25 year income streams tied to the solar energy produced by the project. These returns depend on the location of the project and local energy rates among other factors but typically will generate between 5-10% income annually on your investment.
Timeline breakdown
Year 1: Tax savings, including credits and depreciation: Reduce federal and state taxes by $337,620 (68% of initial investment). Critically this is money the family would otherwise have lost to taxes. Instead, they can reinvest these savings and grow the difference substantially over time.Income: $25,000 (5% of initial investment)
Years 2-6:Tax savings: Reduce federal and state taxes by $77,880 (15.4% of initial investment)Income: $125,000 (5% of initial investment per year)
Years 7-20: Receive 5% of the initial investment per year, or another $350,000.Total: These tax credits and revenue distributions add up to $914,500, none of which the family would have received without their solar investment.Total after-tax benefits If they invest in solar, Aaron and his wife would create additional wealth from three sources: Tax benefits (credits and depreciation), income from the project, and reinvesting their tax savings and solar income.
These three benefits would total $668,241 after taxes.
Tax benefits: After investing in the project they would receive $414,500 of tax savings from the tax credits and depreciation over the first 6 years. We assume that they will reinvest those savings, minus the $250,000 they have to pay in taxes in the first year, and that they will earn a 5% annual growth rate. After 20 years, those initial savings would be worth $391,547, or $312,080 or after taxes.
Investment Income: The solar project will also generate 5% of the original investment amount per year ($25,000 in this case). This amount will be taxed at ordinary income tax rates, so we have applied a 50 rate to this income and assumed the remaining $12,500 would be reinvested each year at a 5% growth rate. After 20 years, this amount would be worth $413,324, or $356,161 after taxes. How do these numbers compare to not investing in solar? A common question is how Aaron would do if they simply paid their taxes and invested the remaining money. Let’s take a look.
Situation Overview Amount not invested in solar: $500k Investment growth: 5%
Not using solar tax credits If Aaron and his wife choose to pay their taxes on $500,000 of income ($250,000 at a 50% rate) and invest the remaining $250,000 at 5% growth for 19 years, they would end up with $631,738. If they then sold those assets and paid taxes, they would net $498,129. Compare that $498,000 to the $668,000 the family would have netted with a solar investment. That’s an additional $170,000, or a 34% additional return. How to invest in qualifying solar projects