Investors in eligible renewable energy projects, therefore, could enjoy two tax benefits: their tax bill could be deferred until the time of sale, with a potentially lower amount of tax than if the distribution had been taxed as ordinary income.
Accessing These Options For Clients
The traditional route for retail clients to invest directly in energy projects has been through master limited partnerships (MLPs), which offer professional diligence, selection and management of energy projects, along with pass-through structures that enable investors to utilize depreciation as a tax shield on other income. The problem, however, is that MLPs are not available in the renewable energy sector—placing the specific tax benefits of investing in green energy projects out of reach.
(MLPs often involve other headaches, as well, including the complexity of dealing with K-1s for tax reporting, and state-by-state tax filings depending on where the underlying assets are held.)
Fortunately, innovative new instruments have emerged in recent years that bring the primary advantages of MLPs—including professional project selection and management, pass-through structures and stable monthly distributions—to the renewable energy sector, while doing away with much of MLPs’ complexity.
These vehicles, sometimes called Yieldcos, are offered by a new breed of publicly listed, project-focused investment firm. In addition to the benefits above, many of these firms focus on purchasing existing green energy projects that already have contracts in place with municipalities and other “off-takers” of electricity, so they feature risk profiles that may be more suitable for retail investors.
Compared to real estate, which can utilize depreciation but at a much slower rate, renewable energy projects offer potentially much more favorable tax advantages for clients. The front end-loaded depreciation allows for a significantly greater portion of distributions to count as a return of capital when compared to REITs.
Combined with the opportunity to reduce carbon emissions at the same time, investments in renewable energy projects may be the ideal solution for clients who seek to lighten their tax load while contributing to the growth of green jobs and renewable energy capacity.
David Sher is co-CEO and director of business development for Greenbacker Capital, an investment firm focused on the sustainable infrastructure sector.