Generally, an off-site community or shared solar energy project is considered an attractive way to generate solar energy due to the efficiency gains in both installation and maintenance costs. These result from economics of scale and the use of relatively low-value, easily accessible land.
In a newly released private letter ruling (PLR), the U.S. Internal Revenue Service (IRS) has approved an individual taxpayer's plan to claim residential solar tax credits for investing in a community/shared solar energy project, even though the facility's solar panels are not on the taxpayer's residential property. The ruling encourages residential property owners to invest in such projects.
{OPENADSALT=zone=72&float=right&margintop=10px&marginleft=10px}
The taxpayer's regional electric utility has provided each owner of the community/shared solar project with net metering credit for the owner's share of the electricity generated by the solar project. Based on the limited facts presented in the PLR, it appears that each owner of the solar project owns both individual photovoltaic panels and a shared interest in various balance of system equipment. Accordingly, the owners were entitled to pro rata shares of the net metering credits generated by the project as a whole.
Traditional application of the rule
Individual taxpayers – as opposed to businesses – are eligible under the Internal Revenue Code (IRC) Section 25D to claim a tax credit against federal income taxes equal to ’30 percent of the qualified solar electric property expenditures made by [a] taxpayer during [a given] year.’ The term ‘qualified solar electric property expenditure’ is defined as ‘property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer.’
The meaning of the clause ‘for use in a dwelling unit … used as a residence by the taxpayer’ may not be entirely clear. Accordingly, in 2013, the IRS released a notice (IRS Notice 2013-47) to answer a commonly asked question with respect to claiming this credit as part of a taxpayer's investment in an off-site energy project. A key point from the notice is as follows:
Question: A taxpayer purchases solar panels that are placed on an off-site solar array and connected to the local public utility's electrical grid that supplies electricity to the taxpayer's residence. The taxpayer enters into a direct contractual arrangement with the local public utility that supplies electricity to the taxpayer's residence to allow the taxpayer to provide electricity to the grid using a net-metering system that measures the amount of electricity produced by the taxpayer's solar panels and transmitted to the grid and the amount of electricity used by the taxpayer's residence and drawn from the grid. The contract states that the taxpayer owns the energy transmitted by the solar panels to the utility grid until drawn from the grid at his residence. Absent any unusual circumstances, the panels will not generate electricity for a specified period in excess of the amount expected to be consumed at the taxpayer's residence during that specified period. Can the taxpayer claim the Section 25D credit?
Answer: Yes. Section 25D(d)(2) defines a qualified solar electric property expenditure, in part, as an expenditure for property that uses solar energy to generate electricity for use in a dwelling unit used as a residence by the taxpayer. The taxpayer's expenditure for off-site solar panels under this type of contractual arrangement with a local public utility that supplies electricity to the taxpayer's residence meets the definition of qualified solar electric property expenditure.
{OPENADSALT=zone=157&margintop=10px&marginright=10px}
A strict reading of this notice might lead taxpayers to understand that to claim these tax credits, a taxpayer must have unshared access to the electricity generated by specific off-site solar panels – a fact pattern that may, generally, be impractical.
The PLR makes explicitly clear for the taxpayer in question that the application of IRC Section 25D can be extended to the taxpayer's expenditures on solar panels and related equipment and installation services with respect to the taxpayer's investment in a community/shared solar energy plant, where the following applies:
- The plant provides energy to the taxpayer's regional public utility;
- This public utility credits the taxpayer for such energy generation; and
- The taxpayer's share in the solar panels is not expected to generate electricity in excess of the taxpayer's residential consumption needs.
Practical impact on solar
The PLR is a very significant development for the community/shared solar energy industry and is likely to lead to the expansion of this market. The PLR makes solar energy tax credits readily accessible to significant groups of taxpayers who have traditionally had difficulty using these credits. Examples of such taxpayers include the following:
- Renters;
- Property owners in homeowners associations that don't permit solar panels;
- Property owners with aesthetic concerns regarding solar panels;
- Property owners who don't directly own their roofs (e.g., condo owners);
- Property owners with homes that have poor access to sunlight; and
- Property owners who would have difficulty financing a full-scale individualized residential installation.
These taxpayers now have the option to buy a portion of a community solar project, claim the corresponding 30% tax credit for their expenditures and use net metering to offset their electric bills with the value of the electricity generated by their portion of the community solar project.
Policies related to community/shared solar energy projects have already been established in 25 states and the District of Columbia, with over 100 such projects believed to be in operation or under development. These projects are likely to expand to additional states as a consequence of this PLR.
PLRs are not intended to be relied upon as precedents by taxpayers who aren't addressed as recipients of a given PLR. However, PLRs are sometimes viewed as a persuasive authority. Furthermore, this PLR on community/shared solar sheds light on the IRS' willingness to be pragmatic in its interpretation of provisions related to solar energy tax credits, especially when read in conjunction with IRS Notice 2013-47, which buttresses the PLR's conclusion.
David K. Burton is a partner and Richard T. Page is an associate in Akin Gump Strauss Hauer & Feld LLP's New York office. Burton and Page focus their practices, in part, on the taxation of project finance transactions involving renewable energy.
