In a recently released private letter ruling (available here), the IRS confirmed that residential solar energy batteries are eligible for the tax credit under Section 25D of the Code (the “Residential Solar Credit”), subject to an important and unexpected caveat.

In Priv. Ltr. Rul. 2018-03-009 (Mar. 2, 2018) (the “PLR”), the taxpayers had previously installed a solar energy system on their home and claimed the Residential Solar Credit.  The taxpayers were now purchasing a battery to integrate into their existing solar energy system.  The battery was designed such that charging would only occur when the solar energy system was producing energy and only up to the instantaneous solar power, thereby ensuring that all energy that was used to charge the battery would come from the solar energy system. The remaining useful life of the solar energy system was expected to exceed the useful life of the battery.  The taxpayers posed two questions to the IRS: (1) Is the battery a type of property that is eligible for the Residential Solar Credit and, if so, (2) will the battery remain eligible for the Residential Solar Credit even though it was installed subsequent to the year in which the solar energy system was installed.

By way of background, Section 25D of the Code provides an individual taxpayer with a Residential Solar Credit in an amount equal to 30 percent (for property placed in service after December 31, 2016 and before January 1, 2020, subject to phasedown thereafter) of such taxpayer’s expenditure for property which uses solar energy to generate electricity for use in the taxpayer’s dwelling unit located in the United States that is used by the taxpayer as a residence.

Significant to the PLR’s analysis, Section 25D does not specify how much of a residence’s energy use must be generated from solar for the solar energy system to be eligible for the Residential Solar Credit.  In contrast, Section 25D also provides an individual taxpayer a credit in an amount equal to 30 percent (for property placed in service after December 31, 2016 and before January 1, 2020, subject to phasedown thereafter) of such taxpayer’s expenditure for solar property to heat water for use in a dwelling unit located in the United States that is used by the taxpayer as a residence.  In this case, Section 25D expressly provides that at least half of the energy used by the property to heat water must be derived from the sun.

In the PLR, the IRS ruled that the battery is considered to be property which uses solar energy to generate electricity and is, therefore, eligible for the Residential Solar Credit.  However, based on the difference in the statutory language with respect to the Residential Solar Credit and the credit for solar property to heat water, the IRS concluded that 100 percent of the energy used by the battery must be derived from the sun in order to claim any amount of the Residential Solar Credit.  Accordingly, the fact that all the energy that was used to charge the battery at issue in the PLR was “effectively assured” to come from the solar energy system was, in the words of the PLR, “essential for this ruling.”  Further, while not expressly mentioned by the IRS in its analysis, it seems likely that the fact that the remaining useful life of the solar energy system was expected to exceed the useful life of the battery supported the IRS’s conclusion that the entire cost of the battery was eligible for the Residential Solar Credit because in all likelihood the battery would be dedicated to the solar energy system for its entire useful life.

This 100 percent requirement for a battery to be eligible for the Residential Solar Credit may come as a surprise to many who are familiar with the so-called 75 percent cliff with respect to the investment tax credit (“ITC”) for solar energy property under Section 48 of the Code.  Under Treasury regulations promulgated under Section 48 of the Code, property that uses both solar energy and a different energy source to generate electricity (so-called “dual-use property”) is eligible for the ITC as long as the use of solar energy is at least 75 percent of its total energy input, i.e., the so-called 75 percent cliff.  If the 75 percent cliff is satisfied, then the dual-use property is eligible for the ITC, but the amount of the ITC is reduced to reflect the proportionate use of solar and non-solar energy sources by the property.  For example, if solar energy is only 80 percent of the property’s total energy input, then the ITC will be 30 percent (the amount of the ITC) multiplied by 80 percent, or 24 percent.  In contrast, under the PLR, a dual-use battery that stores 99 percent solar energy and 1 percent non-solar energy will be eligible for zero percent of the Residential Solar Credit.

With respect to the taxpayer’s second inquiry, the IRS ruled that the earlier installation of an energy system does not affect the availability of Residential Solar Credit for subsequent installations of qualifying property, such as the battery.   The PLR’s conclusion that the battery could be placed in service in a taxable year that was subsequent to the taxable year in which the solar energy system was placed in service is similar to the IRS’s ruling with respect to the ITC.  See Priv. Ltr. Rul. 2012-08-35 (Feb. 24, 2012).  This provides an important opportunity for homeowners who previously purchased solar energy systems to now add a battery and take advantage of the Residential Solar Credit.  However, there are still some unanswered questions.  For instance, if the homeowner leased his solar energy system, could he purchase a battery that is charged exclusively by the leased system and claim the Residential Solar Credit with respect to the battery?  Would the remaining lease term of the solar energy system be required to exceed the battery’s expected useful life?  Would the analysis be different if the homeowner’s contract for the solar energy system was a power purchase agreement?

While some questions remain unanswered, the PLR is good news in that it confirms that subsequently-installed batteries may be eligible for the Residential Solar Credit.  However, taxpayers must be careful that they can demonstrate that 100 percent of the energy used by the battery is derived from a solar source.

 

 

 

 

 

 

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