Navigating the intricacies of federal tax credits can be daunting due to the sheer volume of information available. This blog post aims to discuss the advantages and potential revenue streams tied to federal tax credits.
Our objective is to boost your bank’s cash flow, lower your effective tax rate, empower your team to cultivate new client relationships, explore untapped investment avenues in the realm of tax credits that conventional methods might overlook, and guide you on reducing your tax liability by up to 15% and in some cases more, depending on your effective tax rate.
Benefits of Investing in Tax Credits:
- Reduced Tax Liability: Tax credits directly offset the taxes you owe, dollar-for-dollar, which can lead to significant tax savings.
- Diversification: Investing in tax credits provides an additional avenue for diversifying your investment portfolio.
- Steady Returns: Depending on the specific tax credit program, some investments can provide predictable and stable returns over a specified period, offering reliable income streams.
- Supporting Social and Environmental Goals: Many tax credits are designed to incentivize activities with positive social or environmental impacts, such as investing in renewable energy, affordable housing, or community development, aligning your financial goals with your values.
- Access to Specialized Sectors: Tax credits often target specific industries or sectors, such as renewable energy, historic preservation, or low-income housing. Investing in these sectors through tax credits provides opportunities that might not be easily accessible through traditional investments.
Income Opportunities for Banks:
- Cash flow generated by projects (varies per project) through preferred returns.
- Earning potential from construction or permanent loans (if offered).
- Fee-based revenue from construction or permanent loans (if offered).
- Earning potential from tax equity bridge loans (if offered).
Additional Opportunities for Banks:
- Attracting deposits through newfound sponsor relationships.
- Access to cash reserves (operational, marketing, replacement reserves, etc.) generated by each project.
- Establishment of new relationships with sponsors and developers involved in diverse ventures.
- Public relations prospects. Local and state officials often support such initiatives and attend groundbreaking events and grand openings.
Federal tax credits are typically based on eligible expenses incurred by the project sponsor. They are often limited to what’s available in the private market, although there are exceptions. It’s crucial to understand that a project’s life cycle can span up to three years, with the duration varying by state and project type. Tax equity is often committed to the project very early in its life cycle. Hence, we advise taxpayers to plan a year ahead before utilizing these credits. Doing so allows taxpayers and their advisors to strategically obtain the necessary credits to mitigate their tax liability. Based on our observations, those who delay purchasing federal credits until the third or fourth quarter of the intended utilization year often face higher costs, which can diminish their returns.
If the benefits and potential cash flow interest you, we’d love to connect. We can help determine if our program aligns with your organization’s goals and direction.
