A partnership flip on an illustrative ITC solar project, year by year: what the investor pays, where its return comes from, and why the flip date moves with the sun.
In a partnership flip the tax equity investor takes 99 per cent of the tax items and a share of the cash until it reaches an agreed after-tax IRR, then its share flips down to 5 per cent. It pays the present value, at that target yield, of what it receives before the flip. On an illustrative 100.0 solar project with a 30 per cent ITC, tax equity pays 44.49 for a 7.0 per cent return by the end of year 7; if output runs 10 per cent short, the flip slips to year 9.
Worked in full in The Project Finance Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A US renewable project generates tax credits and depreciation that its sponsor often cannot use, because it does not have enough taxable income. A bank or corporate with a large tax bill can. The partnership flip lets that investor join the project company, take almost all the tax benefits and part of the cash until it has earned its return, and then step back, leaving the project to the sponsor. Transferable credits now offer another route for the credit itself, but depreciation still needs a partner, and the flip remains the template every tax equity term sheet is read against.
| Input | Value |
|---|---|
| Eligible cost | 100.0 |
| ITC, 30% | 30.0 |
| Depreciable basis: cost less half the ITC, 5-year MACRS | 85.0 |
| Cash available a year, flat, 25 years | 9.0 |
| Tax rate | 21% |
| Pre-flip allocation to tax equity: tax items / cash | 99% / 25% |
| Post-flip allocation: tax items and cash | 5% |
| Target after-tax IRR / target flip date | 7.0% / end of year 7 |
The simplifications are deliberate: no debt, the investor can use every loss, and capital accounts never constrain the allocation. Real models track each partner's capital account and value the investor's stake by hypothetical liquidation, which can bring the flip forward or push it back. The figures are illustrative and this is not tax advice.
Each year: taxable income = cash − depreciation. The investor receives ITC × 99% + (−taxable income) × 99% × 21% + cash × 25%.
Year 1: depreciation 85.0 × 20% = 17.00; taxable income 9.0 − 17.00 = −8.00. ITC 29.70, tax saved 1.66, cash 2.25: 33.61
Year 2: depreciation 27.20, loss 18.20: tax saved 3.78 + cash 2.25 = 6.03
Year 7: no depreciation left, taxable income 9.00: tax owed 1.87 against cash of 2.25: 0.38
Investment = PV at 7.0% of years 1 to 7 = 44.49, 44.5% of cost. The sponsor funds 55.51.
Excel: =NPV(7%, TE_flow_Y1:TE_flow_Y7), then the flip year is the first year in which =IRR(TE_flow_Y0:TE_flow_Yn) reaches the target.
| Year | Depreciation | Taxable income | ITC | Tax saved (owed) | Cash | Total | IRR to date |
|---|---|---|---|---|---|---|---|
| 1 | 17.00 | −8.00 | 29.70 | 1.66 | 2.25 | 33.61 | −24.45% |
| 2 | 27.20 | −18.20 | 0.00 | 3.78 | 2.25 | 6.03 | −9.47% |
| 3 | 16.32 | −7.32 | 0.00 | 1.52 | 2.25 | 3.77 | −1.84% |
| 4 | 9.79 | −0.79 | 0.00 | 0.16 | 2.25 | 2.41 | 2.07% |
| 5 | 9.79 | −0.79 | 0.00 | 0.16 | 2.25 | 2.41 | 5.19% |
| 6 | 4.90 | 4.10 | 0.00 | (0.85) | 2.25 | 1.40 | 6.65% |
| 7 | 0.00 | 9.00 | 0.00 | (1.87) | 2.25 | 0.38 | 7.00% |
| 8, after the flip | 0.00 | 9.00 | 0.00 | (0.09) | 0.45 | 0.36 | 7.29% |
The investor pays 44.49 and reaches 7.0 per cent at the end of year 7, as designed. Of the present value it buys, 27.76 is the ITC, 62 per cent; 12.13 is cash and 4.61 tax savings. After the flip it keeps 5 per cent of everything for the rest of the project's life, which takes its whole-life IRR to 9.42 per cent. The sponsor, which keeps 75 per cent of the cash before the flip and 95 per cent after, earns 11.41 per cent after tax, against 11.08 per cent for the whole project if a single owner could use every benefit.
The flip date is set after year 5 for a reason: the ITC is recaptured in part if the investor's interest falls within five years of the project entering service. Year 7 shows the other side of the timing. Once depreciation runs out, 99 per cent of a positive taxable income lands on the investor, which pays 1.87 of tax on 2.25 of cash and keeps 0.38. Each extra pre-flip year adds very little to its IRR, so a shortfall pushes the flip out by years, and it is the sponsor that waits for its 95 per cent share. That is why both sides negotiate hard on the base case.
| Cash available | A year | Flip year | Tax equity IRR, whole life |
|---|---|---|---|
| Base | 9.00 | 7 | 9.42% |
| 95% | 8.55 | 8 | 9.22% |
| 90% | 8.10 | 9 | 9.02% |
| 85% | 7.65 | 9 | 8.80% |
The flip is a yield target, not a date, so an output shortfall is paid for by the sponsor in time: a 10 per cent shortfall delays its 95 per cent share by two years. That is why the base case resource matters as much here as in debt sizing, and why some deals use a fixed-date flip instead, priced accordingly.
| Target flip year | 15% cash | 25% cash | 35% cash |
|---|---|---|---|
| 6 | 39.97 | 44.26 | 48.55 |
| 7 | 39.64 | 44.49 | 49.34 |
| 8 | 39.34 | 44.71 | 50.09 |
| 9 | 39.06 | 44.92 | 50.78 |
The pre-flip cash share is the main lever on how much tax equity a project raises: each 10 points of cash adds about 4.85 at a year-7 flip. A higher target yield lowers the cheque, from 45.20 at 6.0 per cent to 43.15 at 9.0 per cent. Every point of cash given to the investor before the flip is cash that cannot service back-leverage debt, which is where the sponsor's own return is decided; the ordering of those claims is in how a project finance waterfall works.
Models that size tax equity on the ITC, the losses and the cash, but leave out the tax the investor pays on its 99 per cent of positive income in years 6 and 7, overstate the investment it can make: 46.23 instead of 44.49, a 1.73 gap that becomes a funding hole at closing. The same error makes the flip look earlier than it is. Whether the ITC is the right credit in the first place is a separate question, worked in ITC vs PTC for a solar project.
The book's solar and storage case turns on its investment tax credit, and the free workbook for this case shows the return with the credit at 30 per cent and at zero.
The date on which the tax equity investor reaches its target after-tax IRR, after which its share of income, tax items and cash falls, typically from 99% to 5%. On the illustrative project the investor pays 44.49 and reaches 7.0% at the end of year 7. If output is 10% lower it reaches it only in year 9.
The present value, at its target yield, of everything it receives before the flip: ITC, tax losses and cash, net of tax on income once depreciation runs out. On the illustrative 100.0 project that is 44.49, 44.5% of cost, of which the ITC alone is 27.76 in present value.
Because once depreciation runs out the investor's pre-flip flows are thin: 99% of the taxable income is allocated to it, so in year 7 it receives 2.25 of cash, pays 1.87 of tax and keeps 0.38 on a 44.49 investment. Its IRR creeps towards the target, so with output 10% lower the flip moves from year 7 to year 9 and the sponsor waits two more years for its 95% share.
This article is one calculation from The Project Finance Handbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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