Archive for the ‘Taxes’ Category

Congress Passes Extension of Investment Tax Credit (ITC) for Solar

Posted December 18th, 2015 by SRECTrade.

Earlier today, Congress passed the FY 2016 Omnibus Appropriations bill, which includes tax extenders and $1.1 trillion in government funding. The spending package includes a pivotal extension of the federal investment tax credit (ITC) for solar energy. The bill is the result of a bicameral and bipartisan compromise, by which Congressional Democrats pursued the extension of this federal subsidy as partial compensation for lifting the ban on US crude oil exports. At first, Democrats believed that the bill would be a loss for the environment, but Democratic leaders urged their party members to recognize the net benefits of extending support for renewable energy development.

“May the force be with you,” quipped Senator Dianne Feinstein (D-CA), encouraging her fellow Senators to vote in favor of the package just hours after the House passed the bill. The bill passed both chambers of Congress by impressive majorities. The House approved by a 316 to 113 vote, and the Senate approved by a 65 to 33 vote.

While existing law provided the 30% solar ITC through the end of 2016, the extension guarantees 30% through 2019, declining to 26% in 2020 and 22% in 2021. After 2021, the 10% credit for Section 48 (commercial) projects will remain in place, per existing law. However, the bill includes “commence-construction” provisions that allow projects to qualify if they come on-line by the end of 2023. These extensions will help states to meet their Renewable Portfolio Standard and other renewable energy goals by helping project owners offset the cost of investing in renewable energy. The federal ITC, coupled with additional incentives, such as Solar Renewable Energy Credits (SRECs), encourages investment in renewable technologies across the country.

The ITC extension will undoubtedly have a significant impact on the solar industry. Experts project that the extension will increase solar installations by 54 percent (compared to a non-extension scenario) and create a 20 GW annual solar market through 2020. The extension is expected to impact utility-scale solar the most, where installations could increase by as much as 73% through 2020. Comparatively, residential installations are expected to experience a 35% growth, and commercial installations are expected to grow by 51%. This anticipated development will spur economic growth and an anticipated incremental investment of $40 billion in the solar industry.

After proposing an extension of the ITC in his 2016 budget earlier this year, the passage of this bill reinforces President Obama’s inaugural commitment to addressing climate change and protecting the planet for future generations. The bill also follows the historic adoption of the Paris Climate Agreement, which was made at COP21 in Paris earlier this month. Although the Agreement still needs to be adopted by the U.S. Government, the President is resolute that the Agreement will survive Republican opposition and become law. In a statement following COP21, President Obama said that “this moment can be a turning point for the world[,]” and this bill is certainly a step in the right direction for America’s commitment to the new international goal.

SRECs and Taxes: Why SREC Income Should Be Taxable

Posted March 4th, 2011 by SRECTrade.

Despite our best efforts to bring clarity to the debate on the taxation of SRECs, it continues to be a complex issue. We will continue to write about it, not with the expectation that we’ll ever get an answer (short of any official statement from the IRS), but with the expectation that we can provide some perspectives that will allow you and your tax attorney to make the best decision (and please do point your tax advisors to these blog posts). Our earlier blog post providing the perspective of a CPA in New Jersey, who felt that SRECs could be considered a subsidy, drew some attention.

One response from Mark Bolinger, a Research Scientist at Lawrence Berkeley National Laboratory, was of particular interest because, in addition to highlighting the fault in claiming SRECs as a subsidy, he explains why you wouldn’t want the IRS to consider them a subsidy. The question over the taxation of SREC income has further implications because of the ITC or cash grant. If the SRECs were excluded from taxation because they are considered some sort of “subsidy,” then the cost basis of the ITC would have to be reduced by the value of the “subsidy.” He contends that system owners might prefer to pay taxes on SRECs than to reduce the cost basis of the 30% ITC.

Mark pointed out IRS Private Letter Ruling 201035003 which dealt with such a case involving the upfront sale of SRECs to a utility company in which the taxpayer requested affirmation that the proceeds from the sale did not affect the cost basis of the ITC and, subsequently, that the SREC sale not be treated as a subsidy, but rather a taxable sale. According to the private ruling which cannot be cited as precedent, the upfront sale of SRECs was deemed to be a taxable transaction ineligible for the Section 136 exclusion.

He writes: “Specifically, if the SREC payments did actually fall under the Section 136 exclusion and were therefore not taxable, then the basis for the 30% ITC or cash grant would (by law) need to be reduced by the amount of the non-taxable SREC payments (i.e., the 30% benefit would apply to a smaller dollar amount — smaller because you would need to subtract the SREC payments from the eligible system cost).  But how do you know in the project’s first year — when calculating the size of your ITC — what the value of a future stream of SREC payments will be over the life of a PV system?  You can’t know this at the time you are calculating your ITC (SREC prices will vary, system output will vary, no agreement on appropriate discount rate), which almost by default means that SREC payments cannot be considered non-taxable.”

He goes on to say: “it’s not even clear that trying to avoid taxes by seeking refuge under Section 136 is even advantageous to the taxpayer.  The knee-jerk response is always “no taxes mean more value,” but if no taxes also means a reduction in the basis to which the 30% ITC or cash grant apply, then you might — depending on your marginal tax rate — actually prefer to pay the taxes and leave the basis whole.”

This is the most sound reasoning that we’ve seen yet for paying taxes on your SREC income. At the very least it is a strong argument against considering SREC income as a subsidy. It doesn’t necessarily refute one unofficial argument that the SREC income cannot be taxed if it is paying down the cost of an initial capital investment, though we’re confident there are plenty of counterarguments out there. Regardless, the SRECs and Taxes issue will continue to be one left up to interpretation. We will be sure to continue to add contributions from our community in the Taxes section of our blog, and if anyone from the IRS is reading… we’ve got 10,000 readers interested in what you have to say!

Here is the conclusion of the Private Letter Ruling described above:

IRS Private Letter Ruling 201035003
Law & Analysis

Section 25D(a)(1) of the Code allows an individual a credit against the tax imposed for the taxable year in an amount equal to 30 percent of the qualified solar electric property expenditures made by the taxpayer during such year.

Section 25D(d)(2) defines the term “qualified solar electric property expenditure” as an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer.

Section 25D(e)(1) allows the expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the qualified solar electric property and for piping or wiring to interconnect such property to the dwelling unit to be taken into account for purposes of § 25D.

Under § 25D(e)(8)(A), generally, for purposes of determining the tax year when the credit is allowed, an expenditure with respect to an item shall be treated as made when the original installation of the item is completed. Under § 25D(e)(8)(B), in the case of an expenditure in connection with the construction or reconstruction of a structure, such expenditure shall be treated as made when the original use of the constructed or reconstructed structure by the taxpayer begins.

Section 61(a) provides, that, except as otherwise provided by law, gross income means all income from whatever source derived, including gains derived from dealings in property (§ 61(a)(3)). Under § 61, Congress intends to tax all gains or undeniable accessions to wealth, clearly realized, over which taxpayers have complete dominion. Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).

Section 136 provides an exception to this general rule, stating that gross income does 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. Section 136(b) provides, in relevant part, that a taxpayer may not take a tax credit (such as the credit under § 25D) for an expenditure to the extent of the amount excluded as a subsidy under § 136(a) with respect to the expenditure.

In the current situation, Taxpayer sold all of the environmental attributes associated with the RECs to Public Utility in exchange for a payment. As such, Public Utility’s payment to Taxpayer is neither a rebate nor purchase-price adjustment, since Public Utility has no reasonable nexus to the cost or sale of the subject property from the vendor, X. Also, the payment is not a “subsidy” intended to facilitate the acquisition of property deemed advantageous to the payor, though Public Utility may make such PLR-102696-10 4 payments in other contexts. Rather, Taxpayer represents that the transaction between the parties is effectively a sale or exchange of property and property rights. Public Utility will in fact make no payment to Taxpayer absent the transfer of Taxpayer’s valuable property interests (namely, the RECs associated with the Residential Solar System purchased by Taxpayer from X), and the parties specifically state that the subject payment is to be made in consideration of the transfer of such property interests.

Based solely on the information submitted and representations made, we conclude that the proceeds from this sales transaction are not within the purview of § 136. Consequently, Taxpayer must include gain from the sale of the RECs to Public Utility in Taxpayer’s gross income under § 61(a). Further, Taxpayer is not required under § 136(b) to reduce the basis in the Residential Solar System. Taxpayer represents that the Residential Solar System generates electricity for Taxpayer’s residence located in the United States. Thus, Taxpayer may take a credit for 30 % of the expenditures for qualified solar electric property, and Taxpayer does not have to reduce the expenditure by the amount of the REC Payment.

The rulings contained in this letter are based upon information and representations submitted by Taxpayer and accompanied by a penalty of perjury statement executed by Taxpayer. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination. Except as specifically set forth above, we express no opinion concerning the federal income tax consequences of the facts or transactions described above under any other provision of the Code. Specifically, we express no opinion on whether the amounts allocated to the qualified expenditures are correct and thus we express no opinion on the accuracy of the tax credit amount.

This ruling is directed only to the taxpayer who requested it. Under § 6110(k)(3) of the Code, a letter ruling may not be used or cited as precedent.

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SRECs and Taxes – Perspective from a New Jersey CPA

Posted March 2nd, 2011 by SRECTrade.

As tax season approaches, we are asked about how clients should handle the income associated with SREC sales for tax purposes. SRECTrade is not in a position to provide tax advice and we always recommend that clients should consult their tax advisors when it comes to making tax related decisions, but below is some information provided by a New Jersey CPA.

IRS Publication 525 “Taxable and Nontaxable Income” under the caption “Other Income”, states the following:

“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.”

It goes on to define a couple of terms:

“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.”

“Dwelling unit. This includes a house, apartment, condominium, mobile home, boat, or similar property.  If a building or structure contains both dwelling and other units, any subsidy must be properly allocated.”

The CPA’s interpretation of this is that the income from the sale of SRECs is not taxable income to the extent that it does not exceed the net cost of purchase/installation, meaning the actual cost less any federal tax credits and state rebates. The CPA advised their client that the law, both federal and state (NJ in this case), is not definitive with respect to SRECs specifically, but the CPA is comfortable taking this stance based on the information that is available at this time.

This information is provided to help assist SREC sellers in determining the best way to handle their SREC income, but by no means is this definitive. We suggest you consult your tax advisor to determine the best way to handle the income associated with your SREC sales. Additionally, be sure your tax advisor understands the underlying mechanics of how SRECs are utilized as a market based incentive for solar system investment.

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SRECs and Taxes: A Customer’s Perspective

Posted January 25th, 2010 by SRECTrade.

The following is a piece of advice that comes to us from one of our customers, Michael from Maryland. You can find out more about his adventures in solar at www.solarpvhome.com.

Here are my thoughts on the SRECs and taxable income topic. ANY INCOME YOU RECEIVE IS TAXABLE whether if it is from selling items on EBay or selling SRECs. However, if it does not lead to a PROFIT then how can it be reported.

Key Point – To sell SRECs I had to install a Solar PV setup and that cost me money.  My initial cost to sell those SRECs was my total cost of the PV installation less the federal and state incentives. So the proceeds from my SRECs is offset by the cost of the Solar PV system. Therefore, one should not have to declare the proceeds until the total cost of the system has been reached.

For example – my PV system cost me $14320 after federal and state grants.
I received $720 for SRECs in 2009 = my cost is reduced to $13600. If I get $1200 for SRECs in 2010 = my cost is further reduced to $12400. It is not until my total cost is zero that my SRECs will give me a profit. Keep in mind, I am selling my SRECs to recoup my initial investment in solar not to initially profit from selling SRECs. That is how I am going to proceed.

Another way to look at it is that my $14320 investment needs to be depreciated over time. If a Tax expert purchases a computer for $3000 and the useful life is 3 years – it is depreciation over the three years. So if the Tax expert makes $1000 in profit the first year – that is offset by the $1000 computer cost using simple depreciation. Depending upon how you want to depreciate the Solar PV setup 5 Years, 10 Years or useful Life of 25 Years, that depreciation cost would offset my SRECs proceeds.

Moreover, it is just like when I sell items on EBay. I deduct the cost of the item, EBay/PayPal fees, shipping, and packaging from the sale price and then what is left is the PROFIT or “other income” on my 1040 that I report on my taxes.

If one keeps good records – as to the total cost of the PV system and SRECs received – it should be clear to the IRS that a PROFIT was not made until the system’s cost was totally paid off.

– Michael from Maryland

Check out Michael’s personal website at www.solarpvhome.com. It covers his family’s move toward “Going Green and Saving Green”.


SRECs and Taxes

Posted January 19th, 2010 by SRECTrade.

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.