A quick disclaimer: We are hoping to provide this information to help people understand the issues and questions that arise around the tax treatment of SRECs. For definitive legal advice, consult a tax lawyer or tax accountant. If they don’t know, then perhaps this blog post will help them along their way.
With tax season rapidly approaching, we commonly get the following question:
Is the income generated from SRECs considered taxable income?
Questions constantly arise regarding the tax treatment of SRECs and it seems that no legislative body or government agency has explicitly answered the question. For example, the New Jersey Office of Clean Energy, the pioneer in SREC markets, provides the following information in their FAQs:
Is SREC income taxable? Will I be issued a 1099 if I sell my SRECs? Is there sales tax on an SREC?
– There is not a definitive ruling on this issue. We recommend you discuss the issue with your tax accountant and perhaps a tax lawyer.
Well that would be helpful, but chances are your tax accountant or tax lawyer probably doesn’t even know the answer to this question, let alone understand the concept of an SREC. We asked one well-respected accounting firm if they could help us answer this question and they quoted us a $5,000 fee to find out. In a recent article on NJ.com, in a response to a reader’s question on SREC taxation, the article’s author was able to get a quote from IRS spokesperson, Gregg Semanick. Kudos to their efforts, however, we are not sure that they completely understand the concept of an SREC. It is clear from the exerpt shown here that both the article’s author and Semanick have SRECs confused with electricity:
“Semanick offers you kudos for being savvy enough to generate electricity, and in sufficient capacity to have some left over to sell. But, he said, the income from selling your “product” is taxable. You using the income to pay the PSE&G loan has no bearing on the issue of taxability.”
When you sell SRECs you are NOT selling your “left over” solar electricity. Electricity is indeed a product and it certainly makes sense that you would pay taxes on any income generated from that sale of electricity. However, a solar renewable energy certificate, an SREC, is not electricity, it is a tradeable certificate, separate from the electricity, denoting that a megawatt hour of solar electricity was produced (regardless of what happened to the actual electricity).
How do you classify SREC revenues? The answer to this question is complex because, in reality, an SREC is a fabricated commodity created by a government program intended to use a market mechanism to subsidize the cost of solar. We’re not sure how easily the term “subsidy” could be used to describe SRECs, but if the government were subsidizing locally grown foods in order to incentivize you to support local businesses, would it make sense to also tax you on that subsidy, thereby decreasing its value? In the same sense, if the government is using SRECs as a way to level the playing field with other forms of electricity, does it make sense to tax you on the subsidy? That is one simple interpretation, but since the revenues from your SRECs are not a direct subsidy, the answer is a bit more convoluted. The government is lessening the cost of solar to you by forcing electricity suppliers to meet a solar requirement through the purchase of SRECs from solar generators. Those electricity suppliers then pass the cost onto the rate-payers. Therefore, some might argue, it is the consumer, not the government, who is effectively paying the subsidy, so taxation would apply since it is not a “government” subsidy.
Our conversation with the IRS. We spent a great deal of time on the phone with the IRS seeking answers to these questions. Everyone there was extremely helpful, but it took being transferred to several individuals within the organization, before we were able to get a hold of someone with some expertise in anything related to our questions. The first thing we learned is that there is no explicit ruling in IRS documentation relating to Renewable Energy Credits, so any information we were given was based on the interpretations of the individuals at the IRS that we consulted. Therefore, they were unable to provide anything in writing. The key question we were told to ask in this situation was “Are the SRECs sold in order to make a profit.” As long as that answer is no, then the individual we spoke to saw no reason why SRECs should be considered taxable income. Since you are selling the SRECs in order to recoup your investment in solar which supports the government’s intitiative towards clean energy, then you are not profiting from the sale of SRECs. However, if you have begun to turn a profit on the investment as a result of inflated SREC prices (or any other reason), then you should report it to the IRS and pay taxes on the revenues from any SRECs you sell to make a profit.
Our advice. We are often asked if we provide 1099s for our customers. We do not provide the 1099 tax form, but will leave it to our customers to decide how to handle the revenue from their SRECs. You do not need the 1099 to claim the income in your tax filings. If you decide not to claim the income, be aware that the IRS does have the authority to claim taxes as far back as seven years, so you should exercise discipline, understanding that you could some day be asked for that money. Until there is some definitive ruling on this issue, be careful!
And yes, you should definitely discuss it with your tax accountant or a tax lawyer. We hope that the information provided here will give you a better understanding of what you and your advisors need to take into consideration.