April 01, 2013 | By Keith Martin in Washington, DC

Batteries installed as part of rooftop solar systems qualify for a 30% investment tax credit, but the tax credit is subject to a “75% cliff,” the IRS said.

At least 75% of the electricity stored must come from the solar panels rather than the utility grid, and the percentage investment credit is reduced for the percentage of solar electricity versus other electricity stored in the first 12 months after the battery is put in service. If the solar percentage drops below the percentage in the first 12 months in any of the next four years, then there will be partial recapture of the “unvested” tax credit. The tax credit vests ratably over five years.

Thus, for example, if the solar percentage started at 90% in the first 12 months, then the investment credit would be 90% times 30%, or 27%. If the solar usage dropped to 80% the next year, then the original credit on these numbers would have been 80% times 30%, or 24%, for a 3% difference, but since only 80% of the original credit claimed remains unvested, the battery owner would have to repay 80% times 3% or 2.4% to the US Treasury.

The IRS explained its position in a private ruling to a rooftop solar company. The batteries are on the solar panel side of the inverter.

This is the third private ruling that the IRS has issued about batteries. In two earlier rulings issued to wind companies that planned to install large batteries at wind farms, the agency suggested that the 75% cliff did not apply. One wind company represented that electricity from the grid would account on average for just 3% of the electricity stored in a year, and the other represented that the percentage would be closer to 15%. The solar rooftop company said it could not make any representation about the share of solar electricity that would be stored.

The ruling is Private Letter Ruling 201308005. The IRS made it public in late February.