The IRS recently issued a Private Letter Ruling (PLR) clarifying that an individual investor in a net-metered community solar project may claim the federal residential Investment Tax Credit (ITC) under Section 25D of the Internal Revenue Code. (A copy of the PLR is available here.) The PLR is also significant because it appears to eliminate a number of contractual requirements that the utility and taxpayer needed to agree to regarding the tracking and ownership of the power produced by the solar project to be eligible for the credit.
Section 25D Tax Credit and Prior IRS Guidance
Just like the Section 48 ITC, the Section 25D ITC permits an owner of solar and other renewable energy property installed before January 1, 2017 to receive a 30% tax credit against federal income taxes. However, in order to claim the credit the property must “generate electricity for use in a dwelling … used as a residence by the taxpayer.” Some tax practitioners interpreted that to meant the credit was limited to solar projects on or adjacent to the taxpayer’s residence. A few years ago, the IRS provided some guidance in Notice 2013-70 (at Q&A Nos. 26 and 27) that taxpayers could in fact claim the credit for off-site solar projects. However, the fact pattern in the Notice described an off-site net-metered project that was owned by the taxpayer, so questions remained whether taxpayers could claim the credit for investments in co-owned community solar projects. Further, the IRS limited the Notice so that it only applied to net-metering arrangements whereby the taxpayer specifically contracts with its local utility to track “the amount of electricity produced by the taxpayer’s solar panels and transmitted to the grid and the amount of electricity used by the taxpayer’s residence and drawn from the grid” as well as stipulate in the contract that the taxpayer holds title to the energy until it is delivered to the taxpayer’s residence. These requirements were problematic because they were often at odds with utility tariffs and state net-metering laws.
The PLR is partially redacted but it was provided to a Vermont taxpayer requesting clarification as to whether his investment to purchase 10 solar panels in a 640-panel community solar farm along with a partial ownership in related racking, inverters and wiring is eligible for the Section 25D ITC. (A brief write-up about the project and taxpayer in the local press is available here.) The PLR explains that the project’s entire solar energy output is provided to the taxpayer’s local utility which then calculates a net-metering credit pursuant to its tariff and applies a portion of that credit against the taxpayer’s monthly electric bills.