7 Questions to Ask Before Purchasing Solar

Solar can be a powerful tool for tax mitigation and long-term asset ownership, but not all solar purchases are structured the same. Before making a decision, it’s important to understand how the opportunity is structured, what risks exist, and whether the solar purchase can stand up to professional scrutiny.

Before moving forward with a solar purchase, here are seven essential questions every solar provider should be able to answer.

1. What economic benefits exist in year one of solar purchases?

Some solar purchases provide economic returns that are dispersed over a long period of time. Individuals considering solar ownership should be seeking assets that provide year one economic return. Year one benefits provide solar purchasers with the most flexibility.

2. How does the solar provider support generating and tracking material participation?

Not all solar projects offer defined material participation activities for their owners. In order to offset ordinary W-2 income with investment tax credits and bonus depreciation individuals must actively participate to substantiate their active management of the solar business. For those planning to offset W-2 income, individuals should ask what active participation opportunities exist.

Solar purchasers should also ask about material participation tracking software that streamlines material participation activities and management. Documentation may include calendars, meeting records, activity logs, management activities, site visits, and operational management records. Understanding the tracking process upfront can help individuals maintain the necessary records throughout the year.

3. How does the financing structure satisfy IRS at-risk requirements?

Tax credits and benefits are generally only available to the extent an individual solar purchaser is considered “at risk” under IRS rules. If a solar purchase is not structured properly, some expected tax benefits could be limited or challenged.

Key areas to review include cash solar purchase requirements, how debt is structured, whether financing is recourse or nonrecourse, and whether the individual is truly subject to economic risk. These details can provide valuable insight into whether the transaction is designed to support compliance with IRS at-risk rules.

4. Are there any guarantees ensuring a return of the solar purchase?

Guarantees are a red flag in solar purchases and often disqualify federal tax incentives, including investment tax credits. If a guarantee exists ensuring returns or protecting your capital, the solar owner is not truly at risk. As previously mentioned, the transaction being considered at-risk is a critical requirement for claiming tax benefits. Solar purchasers should thoroughly review all transaction documents to identify any guarantees, as the absence of guarantees is essential for maintaining IRS compliance and preserving tax benefits.

5. What should solar purchasers know about future exits, transfers, or buyback provisions?

Before purchasing a solar asset, solar owners should understand what exit options exist post the IRS tax recapture period. Exit options generally include three categories: sell, donate, and hold. Each has requirements and due diligence to be considered compliant. Predetermined exits should always be avoided and will undermine the economic substance of the business transaction.

6. Does the project have a legitimate profit motive beyond tax benefits?

Tax incentives can be a valuable part of a solar purchase, but they should not be the only source of value. Those considering a solar purchase should understand the project’s business purpose and long-term economic potential.

Individuals considering a solar purchase should examine factors such as electricity production, revenue generation, commercial operations, specific business use case, and asset value. A solar project supported by real economic activity may provide a clearer foundation for long-term ownership.

7. How is the project documented to support audit readiness and compliance?

Legal opinions and technical memorandums alone aren’t enough. The memos should be completed by a reputable law and accounting professionals. Solar purchasers should verify that the provided legal opinions and technical memorandums are generated by reputable legal and accounting professionals.

Key legal opinions and memos should be provided on key aspects such as financing, OB3 consideration and associated solar tax deadlines, and qualification of energy property. Credible third-party analysis is often one of the clearest indicators of how well a solar purchase is structured.

The Questions Matter

The right questions separate compliant and unreliable solar purchases. Before purchasing solar assets, individuals should verify that their solar provider can clearly answer such questions about financing structure, material participation support, exit options, and the credentials of their legal and accounting professionals. These seven questions form the foundation of audit-ready, compliant solar ownership.

Information from Fortified Solar, LLC, parent and sister companies, and/or the sender, is for general informational purposes only and is not tax, legal, accounting, or financial advice. Tax benefits depend on statutory requirements and individual circumstances and are not guaranteed; consult your own financial advisors.