Debunking Common Myths About Tax Equity Investments

After the passage of the Inflation Reduction Act of 2022, corporate taxpayers have flocked to acquire renewable energy tax credits to offset their federal tax liabilities. Much of this attention was focused on transferability—the ability to buy and sell tax credits without requiring the traditional tax equity partnership structures.  But tax equity has also benefited from this attention, as higher yields for a similar risk profile to transfer credits has intrigued this new set of energy tax credit buyers.

But as more corporate taxpayers explore the opportunities presented by energy tax credits, misconceptions still persist about how traditional tax equity transactions work and what they require. At Foss & Company, we’ve encountered a number of persistent myths that can prevent potential tax equity investors from capitalizing on one of the most effective strategies for offsetting tax liability while supporting impactful projects like renewable energy and historic preservation. Here’s a breakdown of some of the most common myths—and the facts that debunk them.

Myth #1: Accounting for tax equity is prohibitively complex

Fact: While tax equity accounting does require specialized knowledge, tools and third-party CPA expertise exists to make it far more manageable than most assume. The Proportional Amortization Method (PAM) simplifies accounting for these investments and reduces noise in pre-tax earnings, moving much of the activity to the income tax line in the income statement. When PAM is not an option, third-party advisors with deep experience in HLBV (hypothetical liquidation at book value) reporting can significantly reduce the internal burden on investor accounting teams. Many third-party firms experienced in HLBV will maintain an HLBV model on behalf of the investor and run the impairment calculations on their behalf. For investors who seek a third option, grant accounting treatment may also be a viable path forward, particularly for investors sensitive to International Financial Reporting Standards (IFRS) issues.

Myth #2: Partnership-based investments like tax equity are difficult to manage

Fact: Tax equity partnerships are typically structured for control of the asset and downside risk protection. Tax reporting is provided via a K-1 form, and these partnerships may be organized as regarded or disregarded for tax purposes. Furthermore, Foss & Company acts as either a managing member or non-member manager of the investor partnerships, taking on the majority of day-to-day operations on behalf of the investor. This allows investors to remain largely hands-off while still reaping the benefits of the investment. At no point will an investor be asked to give up all decision-making or relinquished consent rights over the critical decisions an investment partnership faces at any given time during the transition period. Investors are always in control and have tremendous power—up to and including removal of the manager or sponsor if serious issues arise. Ultimately, these partnership-based investment vehicles offer a balanced approach to control and improved returns compared to typical transfer credit discounts.

Myth #3: Companies don’t have extra money to invest in renewables or historic real estate

Fact: Tax equity investments are designed to redirect capital already earmarked for tax payments that do not produce a financial return into projects that yield tax savings and positive, risk-adjusted returns. These investments not only serve a better way to pay taxes and meet corporate sustainability goals, but they can also offer time-value-of-money advantages. For example, investors can reduce their quarterly estimated tax payments while paying for tax credits later in the year, improving cash flow at no additional cost.

Myth #4: Companies don’t want to consolidate tax equity investments onto their balance sheet

Fact: Most tax equity partnerships are designed specifically to avoid consolidation. Consolidation generally requires a controlling interest in the partnership, which tax equity investors typically do not hold. Instead, the project sponsor—not the investor—retains control and assumes consolidation responsibility. This structure keeps the investment off the investor’s balance sheet, aligning with corporate governance and financial reporting preferences.

Myth #5: Tax equity won’t work anymore after changes to federal tax law in 2025 under the One Big Beautiful Bill (OB3)

Fact: The recent legislation, now signed into law as the One Big Beautiful Bill Act, does not eliminate the tax credit programs that support tax equity investments. While the law includes a phasedown schedule for certain mature technologies like wind and solar, other areas—such as energy storage, nuclear, biogas, and carbon capture—will continue to generate strong demand for tax equity investment well into the 2030s. Additionally, the Historic Tax Credit (HTC) remains a permanent component of the federal tax code and is unaffected by OB3. Tax equity remains a durable, long-term strategy for investors seeking attractive returns and tax benefits.

The Bottom Line

Tax equity investments are a powerful tool for offsetting federal tax liability while generating competitive returns and supporting impactful projects. By dispelling these common myths, we hope to encourage more companies to take a fresh look at tax equity and explore how it can fit into their broader investment and ESG strategies.

To learn more about how Foss & Company supports investors throughout the tax equity lifecycle, contact us here.