Tax equity investing can be a complex and challenging process, especially for investors who are exploring this type of investment for the first time. While it can be a valuable and remunerative investment option, there are potential drawbacks, so it’s important for investors to do their homework before diving in.
The members of Forbes Finance Council have guided their clients through a variety of investment options and scenarios, and they’re up-to-date on all the ins and outs of tax equity financing. Here, 12 of them share important things to know before jumping in for the first time.
Members pictured from left to right.
Photos courtesy of the individual members.1. Tax Credits Shouldn’t Outweigh An Investment’s Risk And Reward Relationship
Tax equity investing is generally more valuable for clients at the top marginal tax rate. Tax credit benefits should always be secondary to the investment’s risk and reward relationship. Investors should also understand the investment period and rate of return on tax credit benefits from the initial cost tax credit and the following production income tax credit on the tax equity investment project. - Elie Nour, NOUR PRIVATE WEALTH
2. Smart Investments Can Lessen Your Tax Liability
As part of an investment strategy that is actively managed and considers post-tax gains versus portfolio returns alone, investing in a company that qualifies for tax benefits can lessen your tax liability. As tax equity investments most often support social projects, such as low-income housing or solar energy, one should consider how it may align with investment mandates and socially responsible investment values. - Osman Minkara, CIG Capital Advisors
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3. Changes In Tax Law Can Impact The Value Of Tax Credits
Tax equity investing is a great way to invest in meaningful projects with promising returns and reap the benefits of tax credits for additional upside. Tax equity investors need to be aware of changes in tax laws that could impact the value of the tax credits, as well as the risk that the project may not perform as expected and generate fewer tax credits than anticipated. - Cutler Knupp, The Haskell Company - Dysruptek
4. You Should Avoid Investments That Don’t Meet Your Standard Investment Criteria
Tax equity investing should meet one’s investment criteria independent of potential tax benefits. If the investment is poised for appreciation, income or diversification benefits such as lower volatility or less correlation, then its additional tax-related attributes could be compelling. By contrast, investors should be cautious regarding tax equity investments devoid of other non-tax attributes. - Greg Bassuk, AXS Investments
5. There’s More Than One Way To Approach Tax Equity Investment
High-net-worth investors interested in investing in the equity market should know that there are highly tax-efficient ways to access the market. Rather than buying a fund, investors can hire a manager to invest in a portfolio of individual stocks that closely tracks the market while also generating substantial tax benefits through tax loss harvesting. - Robert Mallernee, Eton Advisors
6. The Tax Credits Aren’t Guaranteed
Tax equity investing is not for first-time investors. It is highly speculative. I would look long and hard at what else the investment is going to provide other than tax credits, because the tax credits are not guaranteed. Renewable energy remains in its infancy, and not enough of a profit is always earned to qualify for tax equity. - Aviva Pinto, Wealthspire Advisors
7. There Are Ownership And Control Restrictions To Consider
Tax equity investments can offer significant tax benefits but come with restrictions on ownership and control. It is important to understand these restrictions, as well as the tax implications and benefits, in order to make informed investment decisions and to ensure that the investment aligns with the investor’s financial goals and risk tolerance. - Crystal Gilmore, The Spearhead Group Inc.
8. It’s Essential To Consider Your Overall Risk Profile And Goals
You need diligence, diligence and more diligence. It’s incumbent on the investor to know all the details of the program. Tax benefits are nice, of course. However, does it fit with your overall risk profile, and is it in alignment with your investing goals? - Anthony Williams, Mosaic Financial Associates
9. You May Need Professional Assistance With The Research
People need to know what their goals are and the amount of risk they are comfortable taking. Make sure your investments are diversified, because there are no guarantees in the stock market. It’s important to understand what the consequences are and do your due diligence. This could mean working with qualified financial advisors who know the intricacies of the investments and can do the research for you. - Letitia Berbaum, The Zandbergen Group
10. You Need To Understand A Project’s Tax Basis
One thing to understand is the concept of “tax basis,” which refers to the amount of investment in a project or asset on which an investor can claim tax incentives. It is important for the investor to understand their tax basis in the project, as it will determine the number of tax incentives they will be able to claim and thus the potential return on their investment. - Jose Rodriguez, Got Credit?
11. Tax Equity Investments Can Reduce Taxable Income And Maximize After-Tax ROIs
The most important thing for investors to understand when exploring tax equity investing for the first time is the potential tax benefits associated with this type of investment. Tax equity investments are a popular way to reduce taxable income and maximize after-tax returns on investments. High-net-worth people or those wishing to reduce their tax loads may profit from these perks. - Angelo Ciaramello, The Funded Trader
12. Tax Equity Investments Are Often Structured As Partnership Interests
An investor exploring tax equity investing should know that tax equity investments are often structured as partnership interests. This means the investor will typically have the potential for profits and losses, like a general partner in a partnership. Understanding this structure is vital because it can impact the financial consequences of the investment. - Jared Weitz, United Capital Source Inc.
