There are three entities involved: the investor, the nonprofit and an installer. The investor, or client, becomes a utility company and uses his or her money to buy solar panels and install them. The installer puts the panels in place. The nonprofit then agrees to purchase power, at a set price, for a period of time, usually 25 years. The installer agrees to manage the business for that period of time, sort of the same way a property manager handles rental property. The nonprofit pays the utility bill each month to the client/investor, and the installer, who usually donates the labor for installation, receives a percentage.
An investor using this technique can work with one nonprofit, like Lu’s client did, or can work with a group of nonprofits, providing each of them with solar power, and this can be coordinated by the installer.
“My clients are not solar energy experts. The installer is the expert in this arrangement,” Lu explains. “This arrangement mitigates the tax bill for the investor, gives the nonprofit a set electricity cost for a number of years and helps the environment.
“In the case of the retiring client, we matched a nonprofit that was interested in lowering its energy expenses and having greater predictability for energy costs over the next few decades with our client. Our client, in return for investing in the solar assets and selling the energy to the nonprofit, could claim the much-needed tax credits.
“The strategy allowed the nonprofit to redistribute its savings into community programs,” Lu says. The deal allowed the client not only the tax credit in a year where his income was higher, it also gave him a way to help battle climate change.
“In this case, my client redirected $1 million that he would have otherwise paid in taxes and invested in solar panels to produce energy to sell to the nonprofit. In return, he reduced his tax bill from 37% to 27%, saving him approximately $1.3 million in taxes for 2020.”
She says that improving the community was one of the client’s goals, and this strategy helped him achieve that.
“We effectively turned a liability into an income-producing asset, which is great for anyone, but is especially valuable for someone who is retiring.
“The client now has excess tax credits, so we are converting his 401(k) to a Roth IRA and using some of the credits to pay the taxes on the converted funds,” she adds.
She says the solution is not appropriate for everyone, though it’s a powerful tool when you can use it. “It is one of the most elegant and sophisticated solutions I have found,” she says.
Blue Zone Wealth Advisors has $300 million in assets. Lu created Blue Zone last December after her team spun off from a larger firm.