Solar subsidies paid by a state to homeowners to encourage them to install rooftop solar systems do not have to be reported by the homeowners as income, the IRS said.
Section 136 of the US tax code spares utility customers from having to report subsidies received directly or indirectly from utilities to help pay for energy conservation measures at a “dwelling unit.”
The IRS analyzed a state program in a private letter ruling made public in February. The state set up an organization to help finance clean energy facilities in the state. The organization pays solar installers part of the cost of solar rooftop systems installed on homes. The subsidies are funded through a surcharge collected by utilities on electricity bills. The utilities remit the surcharges directly to the state organization, and they are kept in a special account.
There are three complications when trying to fit the program under section 136. One is the subsidies are paid by the state rather than the local utility. Another is they are paid to solar installers rather than homeowners. The installers then reduce the amount they charge homeowners. Another complication is the state organization requires assignment to it of the renewable energy credits to which the homeowner is entitled for generating solar electricity in exchange for the subsidy.
The IRS ruled in 2010 that a utility customer who transferred his rights to renewable energy credits to his local utility in exchange for an up-front payment to help defray the cost of a rooftop solar system sold the renewable energy credits to the utility and had to pay tax on the up-front payment. The IRS appeared to reverse course in 2013 in private rulings issued to two utilities about a similar program. It said in 2013 that there is no forward sale of RECs because the utility customers do not promise any particular amount of RECs to the utility in exchange for the up-front payment. (For earlier coverage, see the December 2013 NewsWire article, Utility Rebates.)
The latest ruling suggests the IRS may still be struggling with the issue. The IRS said the subsidies do not have to reported by homeowners as income because they are paid indirectly by utilities. The utilities are not buying RECs because the RECs remain with the state organization. The IRS said the state organization does not have to report the payments to the IRS. Section 6041 of the US tax code requires anyone engaged in a trade or business to report all payments of $600 or more during the year. No reporting is required in this case because the payments are not income to the recipients.
The IRS issued the ruling to the state organization. It is Private Letter Ruling 201607004. The redacted version made public does not reveal the state.