Value of Solar
Value-of-solar tariffs in two US states may be addressed by the IRS.
A homeowner in Austin, Texas sent the agency a letter in late September to ask whether he can claim a federal tax credit on a solar system he installs on his roof if he sells the entire electricity output to the local utility in exchange for credits that he can use against his utility bill.
Homeowners in the United States can claim a federal tax credit for 30% of the system cost for rooftop solar systems installed through December 2016. The electricity must be put to personal use. That is not true in this case at least in form. The homeowner also asked the IRS whether the credits he receives for the electricity must be reported as income from the sale of electricity.
Forty-three states and the District of Columbia allow homeowners with rooftop solar systems to sell the excess electricity produced above what the homeowners use themselves back to the local utility through “net metering” where the utility meter runs backwards. Some utilities complain that they end up paying for such electricity at the retail rate rather than the wholesale rate they would have to pay to buy the same electricity in the broader market.
Austin, Texas and Minnesota are moving away from retail rates for net metering to a price that attempts to value the solar electricity by taking into account the costs of operating the grid as well as societal benefits like reduced carbon emissions. Under both programs, a homeowner sells all his electricity to the grid at the value-of-solar tariff and buys back what he needs at the retail rate. In Austin, the homeowner receives nontransferable credits to use against his utility bill. Austin has already implemented the program. Minnesota approved the practice in 2012, but it is not yet in use. The value of solar rate in Austin is currently 10.7¢ a KWh and is recalculated annually according to a formula. Current retail rates are 1.8¢ to 11.4¢ depending on the pricing tier.
The Austin homeowner who sent the IRS the letter asked the IRS to issue an “information letter” addressing the tax consequences of value-of-solar tariffs.
It is not clear an information letter would give the homeowner what he wants. An information letter is a statement issued by the IRS national office or a district office that “calls attention to a well-established interpretation or principle of tax law . . . without applying it to a specific set of facts.”
Rooftop solar companies are no fans of the value-of-solar movement. Some utilities are also wary of it.
Advocates of such programs say there is no difference in substance between the programs and more traditional net metering. The form as a sale and repurchase is just an accounting device to calculate the net amount the utility should credit the homeowner for the electricity that actually reaches the grid.
However, the IRS may have already tied its hands on the issue. It said in a set of questions and answers about residential solar credits last year that any homeowner selling more than a minimal amount of electricity to the local utility through net metering must reduce his residential solar tax credit on the system by the fraction of total output that will end up being sold to the utility. It suggested the homeowner should be able to claim a 30% investment tax credit instead on the fraction of the solar system that does not qualify for the residential credit since that part of the system would be considered put to business use. The IRS position is in Notice 2013-70 at Q&A27.
Once the decision is made that electricity is being sold, then the conclusion that the credits are income to the homeowner would seem to follow, since they are consideration for the sale. Value-of-solar advocates might do better to change the form.
— contributed by Keith Martin in Washington