United States

Part owner of community solar array eligible for residential energy credit

IRS allows tax credit for off-site array owned by multiple individuals

TAX ALERT  | 

On Sept. 4, 2015, the IRS released Private Letter Ruling 201536017, which concluded that a taxpayer's expenditures for solar panels, related equipment, and installation into an offsite solar array constituted a qualified solar electric property expenditure for the purposes of the section 25D residential energy credit. This ruling, although not binding or legal precedent to anyone except the taxpayer, provides a glimpse into how the IRS might treat taxpayers with similar facts.

Facts

An individual taxpayer purchased solar photovoltaic panels and arranged to have them placed on a ground-mounted solar array where other taxpayers also have solar photovoltaic panels installed. The taxpayer purchased a partial ownership in racking equipment, inverter equipment, wiring, other equipment, and installation services required to integrate his panels into the array as well as to interconnect the array to a public utility's electric distribution system. The taxpayer and the other members participating in the solar array were the initial owners of the array and the related equipment.

The taxpayer's solar panels and the other panels in the solar array generate electricity that is delivered to a single public utility of which the taxpayer is a customer. The public utility calculates a net metering credit based on the aggregate amount of electricity it receives from the solar array. A portion of that credit is applied against the amount that the taxpayer owes the public utility for electric service to his residence. The taxpayer's solar panels are not expected to generate more electricity than the taxpayer will consume at his residence. The taxpayer requested a ruling from the IRS on whether the photovoltaic panels and their associated costs would constitute qualified solar electric property expenditures for the purposes of section 25(d)(2), and if so, whether the taxpayer should be allowed a tax credit for 30 percent of those costs.

Analysis

Section 25D allows for a credit for several types of residential energy efficient property. Property that is classified as qualified solar electric property expenditures is eligible for a 30 percent credit under section 25D(a)(1). Section 25D(d)(2) defines "qualified solar electric property expenditures" as an "expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer." Furthermore, section 25D(e)(1) allows for the definition of expenditure to include labor costs properly allocable to the onsite preparation, assembly, or original installation of the qualified property and for piping or wiring to interconnect the property to the residence.

In 2013, the IRS released Notice 2013-70 providing taxpayers with guidance, in the form of questions and answers, on the credits for residential energy property allowed under sections 25C and 25D. Section 5.02, Q&A No. 26, of the notice asks whether a taxpayer can claim a section 25D credit if the taxpayer purchases solar panels, has them placed at an offsite solar array, and has the solar array connected to the local public utility's electrical grid that supplies electricity to the taxpayer's residence. The IRS answers this question in the affirmative but specifies that the credit is allowable subject to a contractual agreement with the public utility that the taxpayer retains ownership of the electricity transmitted by the solar panels to the utility grid until drawn from the grid at the taxpayer's residence.

In the present letter ruling the IRS concluded that based on the law and the facts provided by the taxpayer, the expenditures met the definition of a qualified solar electric property expenditure and the taxpayer is eligible to claim the section 25D credit for 30 percent of the expenditures.

Impact and Conclusions

At first blush the facts in the letter ruling seem to match the question and answer provided in Notice 2013-70, and thus the answer that the expenditures are eligible might seem obvious. However, the key difference between the taxpayer's facts in the letter ruling and the facts represented in the notice hinge on the direct contractual arrangement with the public utility which specified that the taxpayer in the notice retained ownership of the electricity until it was drawn from the grid. No such contractual rights existed in the facts of the letter ruling, suggesting that other such community solar arrays, similar to the one discussed in the ruling, might also be eligible for the credit.

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