Some Energy Tax Credit Issues

Publication September 10, 2015

Some energy tax credit issues may be revisited by the Internal Revenue Service.

The IRS hopes to issue a notice in September asking for suggestions from the public about areas where its existing regulations about investment tax credits for renewable energy projects need updating. The regulations were written the early 1980s. They address what parts of a renewable energy facility qualify for an investment credit.

The agency hopes, after collecting suggestions, to issue a set of proposed changes to the regulations by the end of June next year. This may be ambitious.

An example of an area where the IRS feels the law could use clarification is a case the US Treasury Department won in January in the Court of Federal Claims where the government allocated the cost of a biomass power plant between the parts of the plant that produce steam and electricity and paid a Treasury cash grant only on the cost allocated to electricity. Cash grants are paid on the same equipment that qualifies for an investment credit.

The Treasury is fighting a similar lawsuit that MeadWestvaco filed in April about another biomass power plant.

The Treasury lost a case in March involving two fuel cell power plants that convert methane gas from municipal wastewater treatment facilities into electricity. The Treasury paid grants on the fuel cell assemblies, but not the gas conditioning equipment. The issue was what the US tax code means by “fuel cell power plant” – the equipment on which an investment credit can be claimed and, by extension, a Treasury cash grant would be paid. (For earlier coverage, see the May 2015 Project Finance NewsWire article on this topic.) The court said the gas conditioning equipment is integral to generating electricity. The fuel cell case is now before a US court of appeals.

Other areas that are ripe for clarification are in what circumstances batteries and other storage facilities qualify for tax credits, when support structures for solar panels mounted over parking canopies qualify, and a series of fact patterns around community solar projects.

The IRS released a private letter ruling in early September that it issued to a Vermont homeowner who bought solar panels that are part of a larger, utility-scale “community” solar array that is some distance from his house. The array was sold panel by panel to multiple individuals. The individuals are all members in a limited liability company that handles administrative and financial tasks related to the array, but they own their panels directly.

All of the electricity from the array is sold to the local utility. Each panel owner buys the electricity he uses in his home from the local utility and receives bill credits for the electricity from his solar panels that are used as an offset against his utility bill.

The IRS told the homeowner he could claim a 30% residential solar credit on the panels he owns. The credit can be claimed on equipment used to generate solar electricity “for use in a dwelling unit [that is] used as a residence by the taxpayer.”

Although not a slam dunk, it was probably the easiest of the three or four community solar fact patterns for the IRS to address. The IRS had already said in a notice in 2013 that the residential credit may be claimed for solar panels owned offsite. The ruling is Private Letter Ruling 201536017.


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