Imagine investing in a project that can help you reduce your income tax burden, earn long-term revenue—and contribute to a greener planet.
Tax equity investments are emerging as a compelling opportunity for accredited investors, offering a triple threat of benefits. By leveraging tax credits generated from renewable energy projects or affordable housing, these specialized equity investments provide a win-win scenario.
In this article, we shine a light on a little-known and exciting tax credit program that can help lower your taxes while supporting sustainable initiatives and potentially boosting your financial returns. Specifically, we will explore how tax equity investments work, specifically focusing on the exciting tax credits available for electric vehicles (EVs) and EV infrastructure.
What is tax equity?
Tax equity is a form of project financing to help fund solar, wind, affordable housing, and other projects that benefit from tax incentives. An emerging category involves funding for electric vehicles. These projects require large amounts of money and the up front costs are often a barrier to their success. Tax equity investors provide the funds to enable these projects and receive tax benefits in return. In 2017 the tax equity market for renewable energy was about $20 billion in the United States and is projected to triple in size. The investors have traditionally been large banks, insurance companies, and real estate funds with significant tax liability.
Introducing tax equity for electric vehicle fleets
For the first time, it is possible to invest in tax equity for electric vehicles. Spring Free EV has developed an investment opportunity that unlocks tax credits and cash flow from electric vehicles.
Last year, the U.S. federal government created a slew of new tax credits designed to bring EV manufacturing stateside, while ramping up the infrastructure necessary to facilitate growth.
However, most EV startups are not eligible to reap these tax benefits because they are too early stage to have the profits to write off—which makes them perfect to share with investors as an investment incentive.
Tax equity investors typically purchase a portion of the equity in a project, such as a fund to purchase EVs for a fleet. In exchange for their investment, they receive a share of the project’s tax credits. The tax credits can then be used to offset the investor’s tax liability.
Tax Code for EV Tax Credits
For electric vehicles the relevant tax credits for the purchase of electric vehicles is split across
Section 30D and Section 45W of the US tax code.
- Section 30D. This credit is available for both individuals and businesses. It is a non-refundable credit, which means that it can only be used to offset your tax liability. The credit is capped at $7,500 for vehicles with a gross vehicle weight rating of less than 14,000 pounds, is assembled in North America, and meets requirements around the source of certain critical materials. The MSRP can’t exceed $80,000 for vans, sport utility vehicles and pickup trucks and $55,000 for other vehicles.
- Section 45W. This credit is only available for commercial businesses, which includes the business of leasing vehicles. It is a refundable credit, which means that you can receive a refund even if you do not owe any taxes. The credit is capped at $7,500 for vehicles with a gross vehicle weight rating of less than 14,000 pounds and $40,000 for other vehicles. There is no income, assembly, or critical materials limit for this credit.
The credit equals the lesser of:
- 15% of your basis in the vehicle (30% if the vehicle is not powered by gas or diesel)
- The incremental cost of the vehicle
The Inflation Reduction Act added 45W in order to stimulate EV demand and IRS interpretation incentivizes leasing companies to bring more affordable leasing options to market.
There is no limit on the number of credits your business can claim. For businesses, the credits are nonrefundable, so you can’t get back more on the credit than you owe in taxes. A 45W credit can be carried over as a general business credit.
Types of Tax Credits Available
Electric Vehicles
- Tax credit of up to $7,500 for new electric vehicles under 14,000 pounds.
- Tax credit of up to $40,000 for new electric vehicles over 14,000 pounds.
- $4,000 tax credit for used electric vehicles (EVs).
- A tax credit is 30% of the cost of hardware and installation of charging equipment, up to $1,000 for residential.
- A tax incentive of up to 30% of the total cost of equipment and installation of charging equipment for businesses, up to $100,000.
Solar
- 30% tax credit for installing solar panels on properties until 2034.
Wind
- Production tax credit (PTC) of 2.6 cents per kilowatt-hour or full investment tax credit (ITC) of 30% for projects over 1 megawatt that satisfy apprenticeship and prevailing wage requirements.
- Base credit amount of 20% of the full credit amount for larger projects that do not meet the wage and apprenticeship requirements.
- Additional allocated environmental justice bonus credits for facilities under 5 megawatts, including locating facilities in low-income communities and on Tribal lands.
- Stackable 10% (PTC) or 10 percentage point (ITC) bonus credits for meeting domestic content thresholds or locating facilities in fossil-fuel-dependent "energy communities."
Home Improvements
- Up to $14,000 in rebates for low- and middle-income households to make their homes greener and more efficient.
- $8,000 rebate for installing heat pumps for heating and cooling homes.
- $1,750 rebate for water heating.
- Tax breaks for purchases of energy efficient clothes dryers and electric cookers.
- 30% tax credits for home improvements that reduce heat leakage, such as upgraded windows and doors.
- $1,600 rebate for insulating and sealing a house.
- $2,500 tax break for improvements to electrical wiring.
- Tax credit for using home-based batteries for energy storage.
Tax Code for Transfer of Renewable Energy Tax Credits
The transferability of tax credits is intended to broaden the pool of potential investors able to benefit from renewable energy tax credits and offer an alternative to the traditional tax equity investment structures.
Section 6418 of the Internal Revenue Code allows taxpayers to transfer their renewable energy tax credits to other taxpayers. This means that if you invest in a renewable energy project, you can sell your tax credits to another taxpayer who can use them to offset their own taxes. This can be a great way to get a return on your investment, even if you don’t have a lot of taxable income yourself.
It is important to note that not all taxpayers are eligible to transfer their tax credits. Tax-exempt entities, governments, and tribes are not eligible. Eligible taxpayers include all other taxpayers and entities classified as partnerships for U.S. federal income tax purposes subject to Subchapter K.
Structuring a Tax Equity Investment
When EV fleet owners want to take advantage of tax equity investments, they often set up a special fund. This lets tax-paying investors get a one-time federal tax credit for each car. These credits, called 45W credits, can be used to reduce their tax bills. Plus, these 45W credits are pretty flexible. They can be applied to taxes from the previous year or saved for up to 20 years in the future. Because of this, we’ve told some investors it might be a good idea to save up these credits, thinking about potential future income.
Comparing Tax Benefits
When we look at various renewable tax credits, the ones for electric vehicles (EVs) under 45W stand out. Why? Because investors can claim the full EV tax credit right away. In contrast, solar and wind tax credits are spread out over time based on how much of a project is done. But with EVs, since the product is ready when bought, the whole tax credit can be claimed instantly. Solar and wind tax credits, on the other hand, are a very mature market worth over $20B. EV tax equity is an emerging market
Who offers tax equity investments?
Tax equity is often used by developers of renewable energy projects, affordable housing projects, and other projects that generate tax credits. Tax equity can also be used by companies, such as fleet owners, that are looking to raise capital for expansion or growth projects.
Typically these developers and companies are looking to do one or all of three things:
- Create a source of capital for projects that may not be able to obtain financing through traditional channels.
- Reduce the cost of financing for projects.
- Incent investors with a return on their investment that is not correlated with the performance of the project.
There are a few different types of companies that offer tax equity investments. These include:
- Project Developers. Developers are companies that develop renewable energy projects or deploy renewable assets like electric vehicles or batteries. They may also offer tax equity investments to help finance their projects.
- Tax equity funds. Tax equity funds are specialized investment vehicles that are designed to invest in tax equity projects. These funds typically have a team of experts who can assess the risks and rewards of these investments.
- Independent power producers. Independent power producers (IPPs) are companies that own and operate renewable energy projects. They often need tax equity investors to help finance their projects.
When choosing a company to invest with, it is important to consider the following factors:
- The company’s experience with tax equity investments. Make sure the company has a track record of successfully investing in tax equity projects.
- The company’s financial strength. Make sure the company has the financial resources to make the investment.
- The company’s fees. Make sure you understand the fees that the company charges for its services.
- The company’s risk tolerance. Make sure the company’s risk tolerance is aligned with your own.
Tax equity investments can be a great way to get involved in the renewable energy industry and earn a return on your investment. However, it is important to do your research and choose a company that is reputable and experienced.
What are the risks of tax equity?
Tax equity can be a valuable tool for developers and investors who are looking to finance projects that generate tax credits. However, it is important to understand the risks associated with tax equity before investing, including:
- The risk that the project will not generate enough tax credits to offset the investor’s tax liability.
- The risk that the project will not be completed on time or within budget.
- The risk that the project will not be successful.
Additionally, while we made every effort to summarize the tax code, and its opportunities and risks, SFEV is not a tax advisor. If you are considering a tax equity investment, we recommend that you please consult your own accountant and tax counsel.
