Are Solar Renewable Energy Credits Taxable?
There has been much recent discussion on solar and energy blogs and in other discussion forums relating to the tax treatment of Solar Renewable Energy Certificate (“SREC”) income.
The purpose of this article is to provide a brief overview of the taxability of SREC income for both commercial and individual taxpayers.
What is an SREC?
An SREC is a solar renewable energy credit that represents the renewable attributes of solar generation bundled in minimum denominations. SRECs are sold separately from the electricity produced by solar renewable energy projects thereby representing a significant revenue source for solar projects.
Are SREC’s Taxable?
It is a well developed concept of tax law that an item of gross income is taxable unless specifically excludable from income. Many bloggers have cited Internal Revenue Code (“IRC”) section 136, Energy Conservation Subsidies Provided by Public Utilities, as support for excluding SREC income from gross income. IRC section 136 addresses subsidies paid directly or indirectly from a utility to a customer for the purchase or installation of any conservation measure.
Although there is scant guidance from IRS relating to the taxation of SREC income, IRS did issue one Private Letter Ruling (“PLR”) discussing this issue. A PLR is a written statement issued by the IRS to a taxpayer in response to a written inquiry from that taxpayer relating to specific facts.IRS does not cite or rely on PLRs issued to one taxpayer as a precedent for disposition of other cases and, in general,a taxpayer may not rely on a letter ruling issued to another taxpayer although a PLR does provide some evidence of IRS’ position relating to that issue.
In PLR 201035003 IRS held that SREC income did not qualify as a utility subsidy under IRC section 136 so was includable in gross income. The facts in the PLR were straightforward: taxpayer purchased a solar electric system to generate electricity for his residence. Taxpayer agreed to transfer any future SRECs generated by the system for a one- time payment from utility. The taxpayer requested a ruling that the SREC income was taxable income in order to not reduce the tax basis of the system to calculate his residential income tax credit.
In the ruling, IRS compared SREC income to the type of payment addressed in IRC 136 stating that the SREC payment was not a rebate or a purchase price adjustment to the property nor was it a subsidy intended to facilitate the acquisition of property. Because it did not qualify as a subsidy as defined in IRC 136 the payment was includable in gross income. Because the SREC income was includable in gross income the payment would not reduce the basis of property eligible for credit.
Until IRS or Congress issues more definitive advice relating to the taxability of SREC income, we believe that the above mentioned PLR supports the position that both commercial and individual taxpayers should treat SREC income as taxable for federal income tax purposes.
Of course, a taxpayer should consult his tax advisor to determine tax treatment under his specific facts.
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