Batteries added to existing rooftop solar systems qualify for tax credits, even if connected to the AC side of the inverter, the IRS said.
The IRS made the statement in a private letter ruling that it made public on March 2. The ruling is Private Letter Ruling 201809003.
The IRS is not issuing rulings about whether batteries qualify for investment tax credits, so the taxpayer asked whether a separate residential solar credit can be claimed.
The rules for the two tax credits are similar, but not identical.
The residential solar credit is in section 25D of the US tax code and can be claimed on solar generating equipment and solar hot water heaters installed in a dwelling unit that is used as a residence by the taxpayer. The credit is 30% of the cost of equipment installed by the end of 2019. It is 26% in 2020, and 22% in 2021.
The ruling addresses four issues.
One is whether the battery is considered part of the solar generating equipment, since a credit can only be claimed on generating equipment. The IRS said yes. This is the same threshold issue for anyone trying to claim an investment tax credit on a battery at a commercial solar project.
Next, the IRS confirmed that it does not matter whether the battery was part of the solar system at original installation or is added later.
It said the battery can be on the AC, or grid, side of the inverter rather than the DC side closer to the rooftop solar panels.
Finally, the taxpayer represented that software he plans to install with the battery will effectively ensure that the battery will be charged solely from solar electricity. The software monitors signals every 0.1 seconds and controls the charging and discharging of the battery. There is also a meter to monitor the source of the electricity during periods the battery is being charged.
The IRS said the taxpayer’s representation that the battery will be charged “solely” from solar electricity was “essential” to the ruling. It said that if any other electricity is used to charge, then the battery will not qualify for any tax credit.
This is different than for the investment tax credit, where the IRS imposes a “75% cliff” on batteries used with rooftop solar systems. At least 75% of the electricity used to charge each year must come from the solar system, and the percentage investment tax credit depends on the percentage of solar electricity used the first year to charge. For example, if the electricity was 80% solar the first year, then the tax credit is 80% of 30% or 24%. There is also recapture of unvested investment credits if the percentage dips in any of the next four years. (For more on this subject, see “Batteries and Tax Credits” in the October 2016 NewsWire.)