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The Current: Systems Using Solar–What Qualifies for the Credit?
Section 48 of the Internal Revenue Code (IRC) provides a 30 percent investment tax credit for equipment that generates electricity from (among other things) solar energy. The definitions provided in Section 48, and the additional guidance in the Internal Revenue Service’s (IRS’s) regulations, still leave many unanswered questions about precisely what equipment, and what portion of its cost, qualifies for the credit.
Back in 2011, The Current considered what portion of building components might qualify for the Section 48 credit (“Recent IRS Rulings on Building Components and Energy Credits,” September 2011). That column observed that three IRS private letter rulings (PLRs) issued between 2009 and 2011 appeared to stand for the principle that the cost of dual-use property that is energy-generating (e.g., energy-generating glass that also serves as a window) qualifies for the credit, while only a portion of the cost of dual-use property that enables other energy-generating property to work better (e.g., a reflective roof covering that improved the output of the energy generating equipment that it accompanied) qualifies.
Now, in PLR 201444025, published Oct. 31, 2014, the IRS considered what qualifies for the credit in the case of a solar energy system, i.e., an integrated assembly of equipment, not all of which generates electricity. Because PLR 201444025 had significant redactions, we must occasionally guess at the parts of the equipment that the IRS is describing. Nonetheless, remembering that a PLR is issued to only one taxpayer and it may not be relied on by others, it isn’t hard to draw some useful conclusions about how the IRS might be expected to handle similar property.
In the PLR, the taxpayer provided solar equipment with other equipment, all attached to or included in what appears to be a kind of housing. Each system included a broad base and it held operational components, including wiring, conversion equipment, control equipment and energy storage batteries. The base added stability to the system, preventing it from blowing over. The system also included locking doors that added security and facilitated maintenance.
The systems were each custom designed for their particular use. Different technologies (particularly thin film solar and flat solar panels) were used, sometimes together. The facilities to which the energy-generating equipment is attached, or in which it is housed, were also custom designed and were not suitable for uses other than supporting the solar generation equipment. Each was specially suited to meet the energy collection, conversion, production needs and grid transmission (if applicable) of the accompanying solar equipment. The only energy source in each system was solar. The taxpayer only sells complete units; it does not sell the separate components. Although the significant redaction of the letter ruling makes it impossible to be certain, it appears that the IRS acknowledged that the cost to produce these units is much greater than the cost to produce “ordinary” energy-generating equipment.
After describing the systems, the IRS went through a detailed recitation of the applicable provisions of the IRC and regulations. In particular, it noted that Section 1.48-9(d) of the regulations defines solar energy property (eligible for the tax credit) to include equipment that uses solar energy to generate electricity, and it includes storage devices, power conditioning equipment, transfer equipment and parts related to the functioning of those items. It does not include any equipment that transmits or uses the electricity generated. In addition, solar energy property includes equipment and materials and parts related to the functioning of equipment that uses solar to generate electricity.
The IRS applied these rules to the solar systems in the PLR, concluding that nearly all of the components of the system use solar energy to generate electricity, including the conversion components, energy storage battery, collection panels, control equipment and wiring.
However, the PLR then notes that a portion of the system not only provides structural support for the solar collectors, but it also provides structural support for lights, surveillance equipment, motion detectors, two-way transmission systems and other attachments not used for the generation of electricity from solar energy. This portion of the system also protects the equipment from damaging weather and general degradation.
On account of the dual purpose served by some of the system (supporting and protecting both the electrical generating equipment as well as the other equipment), the IRS directed the taxpayer to allocate some portion of the basis of the system (to the extent that it performs another function) to non-energy property. The IRS specifically excluded from credit-eligible basis the lights and other attachments described in the preceding paragraph, because they were not used for generating electricity from solar.
What knowledge can we draw from this?
- Like the PLRs before it, PLR 201444025 distinguishes between equipment that is on the list of eligible expenditures, ineligible items and other items that may serve dual purposes. The first is eligible for the tax credit, the second does not qualify for credits and the third must be allocated between the first two. Here, the eligible equipment is the energy-generating equipment, as well as the battery and other equipment identified above. The ineligible equipment includes the lights and surveillance equipment and the equipment enumerated with those items. Finally, the dual-use property is at least the housing that holds and protects both. Note that the ineligible equipment is not “dual purpose;” it is simply ineligible for credits.
- The reference to protecting the equipment from “damaging weather and general degradation” applies to the dual purpose of protecting both the solar generating equipment and the other equipment. In the absence of the dual use, a housing for a credit-eligible machine that protects it from weather and degradation would, itself, qualify for the credit.
- As in the prior PLRs, the IRS did not provide a method for allocating the costs of the dual-purpose part of the system between credit-eligible and ineligible expenditures; the IRS simply directs the taxpayer to “allocate some portion of the basis … to non-energy property.” So, in applying the theory of this ruling to other equipment, it’s unclear if taxpayers should use an averaging method (allocating the costs proportionally between the cost of eligible and ineligible property), a marginal method (allocating to the ineligible column only the additional cost that is attributable to the ineligible expenditures) or something else.
- It is similarly unclear whether a professional appraisal is required to allocate the cost of any dual-use property. Of course, if an appraiser has already been retained, then he or she may as well do the allocation. And, if a method other than a simple pro rata allocation is used, it may also be appropriate for the appraiser to compute the portion of dual use equipment that is eligible for the tax credit.
Finally, it was encouraging to see the IRS acknowledges that these specially designed systems can have a cost that is much greater than the cost to produce “ordinary” equipment. With valuation being such a hot topic in the tax world, it is good to see the IRS respecting the value of the taxpayer’s special designs.
Forrest David Milder is a partner with Nixon Peabody LLP. He has more than 30 years’ experience in tax-advantaged investments including the tax credits that apply to affordable housing, energy, new markets and historic rehabilitation, as well as the tax treatment of partnerships and LLCs, tax-exempt organizations, and structured financial products. He can be reached (617) 345-1055 or [email protected].
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