«Private Letter Ruling on the Eligibility of an Individual Panel Owner in an Offsite, Net-Metered Community-Shared Solar Project to Claim the Section ...»
Private Letter Ruling on the Eligibility of an Individual Panel Owner
in an Offsite, Net-Metered Community-Shared Solar Project to
Claim the Section 25D Tax Credit
The Internal Revenue Service has issued the enclosed Private Letter Ruling concluding that a
particular owner of PV panels in an offsite, community-shared solar array is eligible for the
residential tax credit under section 25D of the U.S. tax code. While the IRS’s ruling is only legally
applicable to the individual taxpayer in question—a solar panel owner in Boardman Hill Solar Farm, a member-managed 150 kW off-site solar array in Vermont—the ruling may open up project opportunities for direct ownership of community-shared solar systems by multiple individuals. This packet contains three documents: 1) an Energy and Cleantech Alert discussing the legal significance of the private letter ruling from Foley Hoag, the law firm which provided the legal work to obtain the IRS ruling, 2) the private letter ruling issued to the petitioning solar panel owner in the Boardman Hill Solar Farm, and 3) a Clean Energy States Alliance (CESA) Frequently Asked Questions leaflet on community-shared solar.
Packet Contents Document Page Foley Hoag Energy and Cleantech Alert discussing the legal significance of the private letter ruling 2 Private letter ruling issued to Boardman Hill Solar Farm panel owner 4 CESA community-shared solar Frequently Asked Questions 8 About the Clean Energy States Alliance: The Clean Energy States Alliance (CESA) is a national nonprofit coalition of public agencies and organizations working together to advance clean energy. CESA members— mostly state agencies—include many of the most innovative, successful, and influential public funders of clean energy initiatives in the country. CESA works with state leaders, federal agencies, industry representatives, and other stakeholders to develop and promote clean energy technologies and markets.
CESA facilitates information sharing, provides technical assistance, coordinates multi-state collaborative projects, and communicates the positions and achievements of its members. For more information, visit www.cesa.org.
Page 1 of 9 Energy and Cleantech Alert IRS Issues Favorable PLR Allowing an Individual Panel Owner in an Offsite, NetMetered Community-Shared Solar Project to Claim the Section 25D Tax Credit Written by Nicola Lemay, Adam Wade August 31, 2015 The Internal Revenue Service has issued a private letter ruling to an individual owner of solar panels installed in an offsite net-metered community-shared solar project confirming the individual’s eligibility for the income tax credit under Section 25D of the Internal Revenue Code. A redacted copy of the PLR is available here. (As of the date of this Alert, the IRS has not provided its release number for the PLR.) This PLR provides significant insight into the IRS view on the application of Section 25D to community-shared solar projects. Foley Hoag attorneys Nicola Lemay and Adam Wade provided the legal work to obtain the PLR on behalf of its clients, the individual taxpayer and the Clean Energy States Alliance (CESA).
The Section 25D Tax Credit Section 25D allows individual taxpayers a federal income tax credit equal to 30% of the qualified solar electric property expenditures made by the taxpayer. The term “qualified solar electric property expenditure” generally means an expenditure for property which uses solar energy to generate electricity for use in the individual taxpayer’s residence within the United States. The Section 25D tax credit is the income tax credit that typically is claimed by an individual taxpayer who purchases a rooftop solar system for his or her residence directly from an installer.
Prior Section 25D Guidance Interpretations before 2013 suggested that the Section 25D tax credit was only available for expenditures incurred for onsite (e.g., rooftop) installations. In Q/A-26 of Notice 2013-70, released November 18, 2013, the IRS clarified that the Section 25D tax credit potentially could be available for expenditures incurred for net-metered offsite solar installations. The practical impact of the Notice for structuring community-shared solar projects has been limited, however, because the Notice only addresses a narrow scenario in which (i) the offsite solar installation is 100% owned by a single individual taxpayer, and (ii) the individual taxpayer enters into a net-metering contract with the local utility that specifically recites that the taxpayer retains legal title to electricity generated by the offsite solar installation until it is delivered to the taxpayer’s residence. Many, if not most, net metering laws and tariffs do not address title to electricity in this way.
Significance of the PLR The new PLR provides written clarification of the IRS’s view on the availability of the Section 25D tax credit for offsite, net-metered community-shared solar installations. In particular, the PLR clarifies that (i) an offsite solar installation that includes solar panels owned by an individual taxpayer, as well as solar panels owned by other individuals, potentially can qualify for the Section 25D tax credit, and (ii) an allocation of net metering credits by the offsite solar installation to an individual taxpayer’s residential utility bill that is based on the number of solar panels in the installation that are owned by the individual and that is generally sized to approximate the amount of such bills can satisfy Section 25D’s requirement that the electricity generated by the solar property be used in the individual taxpayer’s residence. It should be noted that the PLR assumes that the offsite solar installation and the taxpayer’s residence are located in the same state and subject to the jurisdiction of the same public utility.
Significance of the Section 25D Tax Credit for Community-Shared Solar Taking into account the Section 25D tax credit, individuals who are able to fund the upfront costs of acquiring direct ownership of solar assets (whether through personal cash savings, home equity lines of credit or other emergent solar-specific individual financing) may be able to realize greater value and shorter payback periods than the economics offered under third-party solar power purchase agreements (PPAs) or lease transactions.
Community-shared solar is not defined by any one particular type of transaction or financial structure. Many community-shared solar transactions, for example, have made successful use of the 30% business investment tax credit under Section 48 of the Internal Revenue Code. However, the use of the Section 48 tax credit for community-shared solar transactions has clear limitations. The Section 48 tax credit is typically unavailable directly to individual taxpayers because it is a business tax credit, and individuals’ indirect access to the tax credit through investment in an entity that owns a community-shared solar installation is complicated by limitations on the ability of individuals to use tax credits derived from passive activities and “accredited investor” requirements. Further, to monetize the Section 48 investment tax credit, developers generally must negotiate complex transactions with third-party tax equity investors. With the insights offered by the new PLR, individual taxpayers who acquire direct ownership of solar panels in a properly-structured offsite communityshared solar transaction may have an opportunity to approximate what may have been gained had they been able to benefit from the Section 48 tax credit.
Legal Status of the PLR Under the specific facts presented in the PLR, the IRS has agreed with the individual taxpayer that his or her purchase of solar panels that are part of an offsite, net-metered community-shared solar installation qualifies for the Section 25D tax credit. Community-shared solar project developers and individuals should review the PLR with their own tax counsel, accountants, and tax preparers in light of their own specific facts. Although, by law, this PLR cannot be used or cited as precedent by other taxpayers, several cases acknowledge that a private letter ruling can be used as ‘persuasive authority’ or an ‘instructive tool’ by courts, IRS personnel and practitioners. In general, private letter rulings also may be used by the IRS in its own interpretations, including by IRS employees who might consider it in issuing private letter rulings to similarly situated taxpayers.
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United States Treasury Regulations require us to disclose the following: Any tax advice included in this document was not intended or written to be used, and it cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.
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What Is Community-Shared Solar?
Community-shared solar allows multiple electric customers to gain the economic benefits of solar photovoltaics (PV) without having an array located on their own real estate. Simply put, communityshared solar systems provide PV benefits to multiple participants. Community-shared solar projects typically allocate the electrical generation from a jointly owned or third-party-owned PV array to offset many customers’ electricity consumption. Community-shared solar is often facilitated by a supportive state policy such as virtual or group net metering. In other cases, electric utilities offer community-shared solar programs on their own.
Why Is Community-Shared Solar Important?
About half of all households and businesses in the U.S. are not viable candidates to host a PV system on their own property. Community-shared solar offers a way for these electricity customers to take advantage of the benefits of PV. Because community-shared solar can leverage economies of scale and can be installed on low-value land, and because it is accessible to renters and does not require high entry-costs to participate, it presents a powerful tool to increase PV deployment.
In the past five years, the community-shared solar market has grown markedly. Thirteen states and Washington, D.C. have established policies for community-shared renewable energy development.
Already, there are over 100 community-shared solar projects in the U.S. with a combined installed capacity of more than 80 megawatts. According to a GTM Research report, the community-shared solar market in the U.S. is expected to expand sevenfold over the next two years. The GTM report predicts that by the beginning of the next decade, the community-shared solar market will produce a half-gigawatt annual installed capacity in the U.S., between a third and a half of the capacity of all the residential solar systems installed in 2014.
How Are Community-Shared Solar Projects Structured?
Community-shared solar projects can be structured in different ways. A project could be designed to offer customers the option to buy, lease, or subscribe to particular panels in an array or to provide them with an interest in a jointly owned array. Alternatively, a project could be designed to give customers the opportunity to buy a portion of the electrical generation from an array. Some projects function as if a participating customer owns PV panels on his or her own rooftop even though the panels are located in an offsite array. Other models more closely resemble a residential lease arrangement whereby customers pay a series of scheduled payments to a third-party PV array owner.
A community-shared solar project can be administered by a utility, a solar developer, a nonprofit organization, or a group of electricity customers.
The Section 48 tax credit can used by businesses. As currently enacted, the Section 48 tax credit will revert to 10 percent at the end of 2016. In addition to the Section 48 tax credit, federal tax policy allows businesses to depreciate their investments in solar projects on an accelerated basis.
Community-shared solar developers may be eligible to claim the Section 48 tax credit by structuring a project so it is owned by a commercial entity. The value of the tax credit can then be passed on to individual community-shared solar participants or subscribers. However, specific organizational structures must be in place to take advantage of the Section 48 tax credit. If the commercial owner of a community-shared solar project is tax-exempt or lacks sufficient income to warrant tax relief, the tax credit may not have value.
The Section 25D tax credit is for taxpayers using the solar property for residential purposes. The Section 25D tax credit is currently scheduled to sunset at the end of 2016.
Until recently, it has not been clear whether an individual owner of solar panels installed in an offsite community-shared solar array qualifies for the Section 25D tax credit. The new IRS private letter ruling represents the first instance in which the IRS has publicly weighed in on the applicability of the Section 25D tax credit to an owner of solar panels in an offsite, community-shared solar array.
By law, the private letter ruling cannot be used or cited as precedent by other taxpayers, but the ruling suggests that the IRS may be receptive to claims for the Section 25D tax credit when a community-shared solar project mirrors the structure at issue in the ruling. While the Section 25D tax credit likely applies to a relatively small segment of the current community-shared solar market, this private letter ruling may open up project opportunities for direct ownership of communityshared solar systems by multiple individuals. Consult a tax professional before assuming eligibility for any tax credits for a solar energy project.
About the Clean Energy States Alliance: The Clean Energy States Alliance (CESA) is a national nonprofit coalition of public agencies and organizations working together to advance clean energy.