Understanding Active and Passive Income Offset While Investing in Solar Projects

When investing in solar projects, one of the biggest concepts to understand is whether you are looking to offset passive or active income. Join Chris Lord, HeatSpring instructor and Managing Director at CapIron, Inc., and Nick Giannotti, Managing Member at Redball Ventures, as they discuss the concept in How to Invest in a Solar Project: Get Tax Benefits and Do Good. Check out the clip or read the transcript below. 

Chris: One of the challenges I know for investing in projects, you’ve got the active and passive income rules, so that if you are generating tax credits from an active trader business, you get to offset active income from a trader business and shelter that with those credits.

But alternatively, if you’re not active. Then you’re a passive investor and in that case you could only use it on passive income. 

So for example, if you’ve got a salary from somebody or you own a business and you’re generating income from that business, you’re not going to be able to offset that passive income.

powered by Advanced iFrame. Get the Pro version on CodeCanyon.

Nick: That’s correct.

Chris: It sounds like you addressed the active/passive issue by being an active participant of solar space already. It sounds like you already had done projects and/or were involved with a company. Is that how it worked and did investors go that route or were some of them passive, say real estate investor people who own apartment buildings and are generating income from that? How did that work in terms of partners? 

Nick: Yeah, so it was a mixture of both, right. So again, I said to people, “hey, listen, you need to talk with your accountants, understand the rules, and you know, I can talk through the guidelines at a high level.” But I’m not one to give tax advice, because I don’t know people’s personal situations.

So there are plenty of people that say, “eh, I’m not into that. I’m concerned about the risk, you know, between the active/ passive.” 

There were a lot of people who are already involved in the solar industry, and so this is their industry. This is their business. They feel very confident and comfortable about that. And what better way to put your tax liability to work than to invest in your industry. 

And then there were plenty of people who had actually lots of passive income that they got with their accountants and said, “oh, listen, this is what our passive income liability is. This is what our active liability is. We’re just looking to take care of our passive liability.” And that’s how we managed accordingly. 

Chris: So I just want to call  out for our audience that this is a big gating item – whether you are looking to offset passive or active income. And if you’re not already active in the solar business, then you’re going to be looking at passive activities and passive income and whether you have enough, and that definitely requires an accountant.

So I would say that group is going to be probably more well-heeled than the active. The active group could be well-heeled as well, but at the same time, if you’re active in the space, it doesn’t matter if you’re making a ton of money or not. As long as you have a tax liability, you can make an investment.

But again, there are accountants and lawyers who have views on what active means and how that relates.