In situations where a company has insufficient tax liability or doesn’t pay taxes, an operating lease can be a great option. For flow-through entities such as a limited liability company (LLC) or an S-Corporation (S-Corp), this would be an outstanding choice.
With an operating lease, the leasing company (lessor) owns the solar project for a defined term, typically 5 to 7 years. The lessor can then capture the 30% federal investment tax credit (ITC) and the 5-year accelerated depreciation. In turn, the host entity of the solar project (lessee) will pay a monthly lease cost to the lessor. This monthly lease cost is 100% tax deductible to the lessee. At the end of the lease, there exists a purchase option at the greater amount of fair market value (FMV) or 15% of the purchase price. At this point, the lessor can pay off or refinance the balance for another period (typically 18 months). This option is limited to projects with a $100,000 to $5,000,000 budget, for entities two years or older, and with annual revenues of $1,000,000 or higher.