Tax equity investment represents a unique opportunity for both growing your passive income and lowering your tax bill. In exchange for partnering in and helping to fund a renewable energy project—such as a solar installation—an investor in exchange receives significant savings on their taxes. These savings can more than compensate for the initial investment.

It’s wise to consult experts to ensure you understand the details, timelines, responsibilities and restrictions before making a commitment. Below, six experts from Forbes Finance Council share critical details every investor needs to know before venturing into tax equity investment.

1. Investments can be affected by ongoing regulatory changes.

With the inherent risks in these types of investments, it may be best to pursue them with the help of professional advice. Regulatory and legislative changes can affect a variety of factors, and you may not be equipped to track and address these changes on your own. - Julio Gonzalez, Engineered Tax Services Inc.

2. Uncertainty in the sector makes it important to diversify your income streams.

Regulatory uncertainty abounds in this industry. All it takes is a tax credit to get scrapped to have your entire funding model disrupted. To manage regulatory risk, make sure you’re diversifying your income streams with other, more traditional forms of equity financing. - Tyler Gallagher, Regal Assets

3. Tax equity investments should conform to your values.

The big equation seems to me to be about ROI. Investor tax credits are an attractive way to achieve steady, long-term returns, particularly on infrastructure projects. But are there better, lower-risk, higher-return options for investors? I think so. Tax equity investments should conform to an investor’s values as much as their financial goals. You can’t put a price on saving the planet for generations to come. - Todd Sixt, Strait & Sound Wealth Management LLC

4. Low investment rates in 2020 have created both opportunity and risk.

These investments are common in the solar energy field in cases where the project developer doesn’t make enough yet to take tax credits. A willing outside investor can make splendid use of the credits in exchange for cash funding. With Covid-19 hitting and people being worried that their tax rate might shrink, 2020 wasn’t the best of years for tax equity investment—not many invested, which creates both opportunity and risk. - Jackie Meyer, Meyer Tax, The Concierge CPA Coach

5. It’s important to take a look at the past performance of indexes and sectors.

Before considering any tax equity investment, it’s important to become familiar with the history of stock asset classes. Make sure you look at and understand the past performance of various market indexes and sectors before making an investment. - Robert Zuccaro, Target QR Strategies

6. It’s a speculative venture, so it’s wise to speak with others who have tried it.

How about not venturing into them at all? These aren’t “investments,” they are “speculations.” Find someone who was an “investor” in tax-focused limited partnerships in the 1980s and ask them how that worked out for them. Start by talking to people with gray hair. Their hard-earned wisdom will save you a lot of time and money. - Erik Christman, Oxford Financial Partners

 

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