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Renewable Energy Credits, Tax Credits, revenue

My wife and I are about to install a solar energy system on our roof.

Massachusetts has a "Solar Renewable Energy Credit" (SREC) program. For those who aren't familiar with this, the state requires the electric utilities to generate a certain percentage of their capacity from renewable energy. If they don't, they have to buy SRECs to make up the difference. They can buy them directly from the state at a premium, or buy them at a slight discount at auction from other people who are generating renewable energy, like my wife and me. In short, we'll make a few thousand dollars per year from the SREC program in addition to the savings on our electric bill.

The question at hand is, are SREC payments taxable?

No one seems to know for certain. Neither the IRS nor the Massachusetts DOR has issued a definitive ruling. Everyone says "consult your tax professional," but they don't know either. However, the conventional wisdom is that if you install your solar energy system to make money (which we are), and you use the SRECs to offset the initial cost of the system, then you don't have to pay taxes on them until represent a *profit*, i.e., until you've recouped your initial investment.

However, it seems to me that if you are going to treat the solar system as a profit-producing activity for the purpose of deciding whether the SRECs are taxable, then you also need to treat it tat way in other ways, most notably by depreciating its cost over time, in which case any portion of the SREC income that exceeds the value of the system allocated to that time period would be taxable. You would also need to report both the depreciation and the SREC income on your tax return.

Most of the people saying they don't have to pay taxes on SRECs until they've repaid their system do not seem to be planning to either depreciate the system or report the SRECs, so I think they're just looking for an excuse not to pay taxes on the SRECs without wanting to do the work to make that legitimate.

Another interesting question that comes out of this discussion is this... If the solar system is a profit-producing activity, and the SRECs represent taxable revenue for that activity, then it seems to me that you also have to treat the revenue from the electricity you produce as taxable revenue as well. The response of, "No, I don't, because my house uses more electricity than my solar system produces," doesn't hold water, because the day-to-day electricity used by your house isn't part of the profit-producing activity, so your solar system is essentially selling electricity to your house.

If I'm right that the generated electricity needs to be treated as taxable revenue just like the SRECs, then this argument that the SRECs aren't taxable until the system is paid for is very dangerous, because the majority of the revenue from the system is going to come from the electricity, not the SRECs.

Therefore, it appears to me that the best course of action, if you're looking for the best possible ROI on your solar investment, is to treat the solar system as a capital improvement, not a profit-making activity. If you do that, then yes, you have to pay taxes on the SRECs, but you *don't* have to pay taxes on the generated electricity, since it's just reducing your electric bill, not making you any money, and in the end, you come out ahead.

I'd love to hear other people's thoughts about this.

Reply to
Jonathan Kamens
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Note that you should receive a 1099-misc for this. Also, don't forget about the state income tax on this income.

Reply to
bo peep

The issue revolves around how one interprets Internal Revenue Code Section 136. See below for text. It is this section of the Code that triggers the wording in IRS Pub 525 page 32:

"Energy conservation subsidies. You can exclude from gross income any subsidy provided, either directly or indirectly, by public utilities for the purchase or installation of an energy conservation measure for a dwelling unit. Energy conservation measure. This includes installations or modifications that are primarily designed to reduce consumption of electricity or natural gas, or improve the management of energy demand."

The question that has no definitive ruling is whether these SRECs meet the definition of being an excludable subsidy.

It seems to me that one could interpret the use of the word "indirectly" to include the value of the SREC when sold. Clearly, the cost of the purchase and/or installation is being subsidized by the renewable credits.

I would feel comfortable excluding the amount from income. I would also take the position, that you would have to reduce your cost basis for the solar system by the amount of any subsidy. If over time, your basis goes below zero, you would have taxable income.

Text: § 136. Energy conservation subsidies provided by public utilities.

(a) Exclusion. Gross income shall not include the value of any subsidy provided (directly or indirectly) by a public utility to a customer for the purchase or installation of any energy conservation measure.

(b) Denial of double benefit. Notwithstanding any other provision of this subtitle, no deduction or credit shall be allowed for, or by reason of, any expenditure to the extent of the amount excluded under subsection (a) for any subsidy which was provided with respect to such expenditure. The adjusted basis of any property shall be reduced by the amount excluded under subsection (a) which was provided with respect to such property.

(c) Energy conservation measure. (1) In general. For purposes of this section, the term "energy conservation measure" means any installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand with respect to a dwelling unit. (2) Other definitions. For purposes of this subsection-- (A) Dwelling unit. The term "dwelling unit" has the meaning given such term by section 280A(f)(1). (B) Public utility. The term "public utility" means a person engaged in the sale of electricity or natural gas to residential, commercial, or industrial customers for use by such customers. For purposes of the preceding sentence, the term "person" includes the Federal Government, a State or local government or any political subdivision thereof, or any instrumentality of any of the foregoing.

(d) Exception. This section shall not apply to any payment to or from a qualified cogeneration facility or qualifying small power production facility pursuant to section 210 of the Public Utility Regulatory Policy Act of 1978.

Reply to
Alan

Nope. Nobody issues 1099's for SREC payments. They *do* issue

1099's for the state and city rebates they're giving out to people who install solar systems, and everybody seems to agree that these are taxable. It's not those rebates that I'm talking about, it's the SRECs I'll be making for at least the next ten years after I install the system.
Reply to
Jonathan Kamens

I don't think so.

Please see:

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If you eliminate the Section 136 argument, then all that's left is what I posted in my last message, i.e., the argument that you don't have to pay taxes on the SRECs until you recoup your initial investment and start making a profit. I'd like to hear what people think about my theory for why that argument is also wrong.

Thanks.

Reply to
Jonathan Kamens

Well... after reading the PLR, it certainly appears to be on point. Even though one can not rely upon someone else's PLR, it certainly tells us the IRS thinking. Based on that, I would have no problem treating it as a taxable sale of property with no corresponding offset.

Reply to
Alan

This sounds like a subsidy for the initial purchase of your solar equipment. Basically it sounds like 136 is allowing public companies to give tax-free solar credits just as the IRS does.

But for an ongoing activity that's continually producing income, I think the SREC is Line 21 ordinary income. If I buy a machine that helps me squeeze orange juice and produce income from it, that income is fully taxable and does not offset the cost of the machine. The machine is depreciated, and depreciation is recaptured when you sell the machine. Allowing you to decrease the cost of the equipment as a way of writing of your income is a way of converting ordinary income, taxed at higher rates, into capital gains, taxed at lower rates. Besides it does not seem right to lower of the cost of the equipment, because when you sell the house you likely recover the original cost of the equipment as it is an income producing assets (people will pay more for a house with solar panels, although I read somewhere that solar panels lower the price of your house as they are an eyesore but I'm not buying that). Yet the profit you make will likely be tax free because of the section 121 exclusion.

So I think the correct thing to do here is depreciate the solar equipment after allocating between personal and business use, and when you sell your house recapture depreciation on the item. You need the cost basis for your main house without the solar equipment, and the cost basis for the solar equipment (which is reduced by any credits received). But this sounds too complicated for ordinary citizens. And besides the amount the public utilities buy from you will change every year depending on how much clean energy they produce, the weather, etc -- and thus the business percentage will change from year to year. So I think the correct thing to do here is to not depreciate, not recapture, but treat all income as Line 21 Other Income.

Reply to
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