Questions about solar investments usually start with taxes. Investors hear about large write-offs, accelerated depreciation, and credits that can offset other income, and it sounds compelling. But whenever an investment is framed primarily around tax benefits, I want to slow the conversation down.
The right starting point is not the tax incentive. It is the investment itself.
Start With the Investment, Not the Tax Benefit
A question like “Should I invest in commercial solar?” is similar to asking whether restaurants are a good investment. It depends. There are many different structures, operators, and projects, and they are not all created equal.
Solar projects often involve large upfront capital costs. Equipment, installation, and infrastructure can create significant depreciation early on. With accelerated depreciation rules, especially those expanded in recent years, investors may be able to recognize a large paper loss in the first few years. That loss can sometimes be used to offset gains elsewhere, which improves near-term cash flow.
From a pure time value of money perspective, saving taxes today can be more attractive than spreading those deductions out over decades. That is why these investments get so much attention.
But tax benefits alone do not make an investment good.
Why Accelerated Depreciation Creates Blind Spots
The concern I have with many tax-driven investments is what happens after the tax benefits fade. Depreciation and credits are usually front-loaded. The first few years may look excellent on paper, especially when projections focus heavily on losses and tax savings.
The real question is what the investment looks like in years five through ten.
If the tax benefits disappear and the underlying project only produces modest returns, or even losses, investors can find themselves locked into an illiquid investment with limited upside. Liquidity matters. Exit plans matter. Sustainable cash flow matters.
If the only reason an investment works is because of depreciation and credits, that is not much of an investment. Eventually, those benefits run out.
Government Incentives Can Change
Solar is not unique in this respect. Similar dynamics exist in oil and gas investments and other energy-related projects. These sectors often receive incentives because the government wants to encourage specific behavior.
But incentives can change. We have already seen pullbacks and shifts in solar-related credits and policies. That adds another layer of risk. If an investment relies heavily on a favorable policy environment, you need to understand what happens if that environment shifts.
Look Beyond the First Five Years
One thing I encourage investors to do is ask to see projections beyond the early years. Often, pro formas focus on the first three to five years because that is where the tax benefits are concentrated. Years five through ten may be missing or dismissed as too difficult to estimate.
That should raise questions.
You want to understand whether this is a business you would still want to own once the tax benefits are gone. Is it profitable on its own? Does it generate reasonable returns for the risk and lack of liquidity involved? Is there a clear exit strategy?
When Tax Benefits Are a Bonus, Not the Strategy
None of this means solar investments are inherently bad. There are strong opportunities in energy and real estate, and tax incentives can meaningfully improve outcomes when layered on top of a solid investment.
The key distinction is whether the tax benefits are the primary driver or simply an added benefit.
If the investment stands on its own merits, and the tax incentives are a bonus, that is a very different conversation than investing purely to generate losses or write-offs.
The goal is to invest in a business you believe in, not to let the tax tail wag the dog.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on tax-driven investments, depreciation strategies, and evaluating complex opportunities, listen to the full podcast episode here.