Utility rebates to customers to induce them to install rooftop solar can be deducted when paid by the utilities, the IRS ruled privately, and are not advance payments for renewable energy credits, even though the customer must assign all of his renewable energy credits to the utility.
The ruling is at odds with an earlier ruling the IRS released in 2010. It is not clear to what extent the utility arrangements the IRS analyzed differ.
The new ruling is Private Letter Ruling 201341031. The IRS made it public in October. The agency issued at least one other identical ruling at the same time. Both the latest rulings and the one in 2010 appear to involve utilities in Arizona.
The state has a renewable portfolio standard requiring a certain percentage of the renewable energy that regulated electric utilities are required to supply customers to come from “distributed energy,” meaning electricity generated by equipment located on its customers’ premises. Utilities have to turn in renewable energy credits at year end reflecting the amount of renewable energy they supplied.
The latest rulings were issued to utilities. The utilities asked for rulings about up-front payments they make to both residential and commercial customers as an inducement to install solar. The amount of each up-front payment is a function of potential energy production. The customer must agree to purchase, install and maintain an eligible system.
The IRS said the payments are not forward purchases of renewable energy credits. It pointed to the fact that the customers do not promise to produce any particular number of RECs (although each payment is tied to projected output). It also said the RECs have no value to anyone other than the particular utility because the utility can only count RECs from its own customers for purposes of complying with the distributed energy part of the state RPS target. There is no possibility of selling distributed energy RECs to anyone else.
The 2010 ruling was issued to a homeowner who 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 utility reported the payment as a forward purchase of RECs. The IRS said the homeowner had to report it as income from the sale of RECs.
Most homeowners do not report up-front payments from utilities 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 to take energy efficiency measures to reduce consumption of electricity or natural gas does not have to be reported as income.
Solar companies who lease solar systems to homeowners or sign power contracts to sell them the electricity from such systems were troubled by the 2010 ruling. Any rebates that a homeowner has to report as income from the sale of RECs could end up being 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