Solar rebates to homeowners by their local utilities must be reported in some cases as income. Section 136 of the US tax code says that any payment a homeowner receives from his or her local utility as an inducement take energy efficiency measures to reduce consumption of electricity or natural gas does not have to be reported as income. However, in at least one state, homeowners receiving the payments must agree to transfer all the renewable energy credits to which they are entitled to the utility. The utility treats the payment as a forward purchase of the RECs. The IRS said in a private letter ruling that homeowners receiving such payments must report them as income. The homeowner who received the ruling was probably in Arizona. He or she bought a rooftop solar system and then agreed to transfer the rights to all “environmental credits, benefits, emissions reductions, offsets and allowances” associated with the electricity produced to the local utility for a fixed term of years for a one-time payment. The IRS said the homeowner had to report the payment as gain from the sale of RECs. However, because of that, it can claim a 30% residential tax credit on the cost of the solar system. If the payment had not been income, then the tax credit could only be claimed on the portion the system cost not covered by the utility rebate. Solar residential companies who lease solar systems to homeowners or sign power contracts to sell them the electricity from such systems find the ruling troubling. If the rebates are taxable to the homeowners, it could mean the amounts will be taxed twice—once to the homeowner and again to the solar company—when, as typically happens, the homeowner assigns its right to the rebate to the solar company.
By Keith Martin