March 9, 2018 IRS rules battery installed on existing qualified solar electric property is eligible for credit In PLR 201809003, the IRS ruled that a battery installed on existing qualified residential solar electric property is also qualifying property eligible for the 30% credit under Section 25D(d)(2) for energy-efficient residential property. Facts A married couple (Taxpayers) purchased and installed a solar energy system that met the requirements for "qualified solar electric property expenditures" under Section 25D(d)(2). The Taxpayers claimed the Section 25D credit for 30% of the costs of the solar energy system in the year installation was complete. The Taxpayers are now purchasing a compatible battery system (the Battery) consisting of an AC battery, an inverter that will convert solar electricity between AC and DC so the battery can charge and discharge the solar electricity, the required wiring to connect to the solar energy system and a software management tool. The Battery will be programed to charge only from the solar energy system and is expected to have a storage capacity of 13.5 kilowatt hours (kWh) and a power rating of 5 kilowatts (kW). The remaining useful life of the solar energy system is expected to exceed the useful life of the Battery, so the Battery will likely need to be replaced at some point. Law and analysis Section 25D allows a nonrefundable credit for qualified expenditures for energy-efficient residential property. For qualified solar electric property placed in service after December 31, 2016, and before January 1, 2020, the credit equals 30% of the cost. The IRS ruled that the Battery meets the definition of a "qualified solar electric property expenditure" under Section 25D(d)(2) and is thus eligible for the credit. The software management tool portion, however, is only considered part of the qualified solar electric property so long as it is required in monitoring the charging and discharging of solar energy. Additionally, labor costs that are properly allocable to the onsite preparation, assembly or original installation of the Battery and for piping or wiring to interconnect the Battery are eligible for the credit. The IRS noted that the representation that all energy used to charge the Battery is from the solar energy system is essential for this ruling. The ruling states that 100% of the energy used by the Battery must be derived from the sun or the Battery would not meet the definition of "qualified solar electric property." Secondly, the IRS ruled that the Battery cost is a "qualified solar electric property expenditure" when installed in a tax year after the tax year in which the installation of the other solar energy system components is completed. The IRS clarified that earlier installations of qualifying property do not affect the availability of the credit for qualifying property in later years. Implications Although the PLR addresses the residential credit under Section 25D rather than the investment tax credit (ITC) available to commercial projects under Section 48, it may have implications for the ITC. In particular, the ruling provides some insight as to the Service's thinking about battery storage in the context of solar energy equipment. Storage technologies may prove to be a key component of mitigating the intermittency inherent in the delivery of electricity derived from renewable energy. Additionally, the ability to utilize the electricity at a different time than when generated has the potential to add significant value to a solar facility, although the specific value depends largely upon utility rate structures where the facility is located. The PLR's conclusion that the storage system is a new and separate credit-eligible asset is extremely important for the industry. It suggests that when storage components are added to an existing solar system, the new components can qualify for the ITC, whether or not the system as a whole satisfies the 80/20 test. The ability to claim the credit on storage added to existing solar systems should significantly help with adoption given that, in many locations, the economic value proposition of battery systems is still improving. An issue for both residential and commercial battery storage technology is that a battery system may be charged by multiple sources of electricity, including sources that are not eligible solar property. Treas. Reg. 1.48-9(d)(6) requires the battery to be charged at least 75% by renewable energy assets (solar or wind) in order to be eligible for the ITC under Section 48. This 75% "cliff" test must be assessed each year during the five-year recapture period. Although similar statutory language is used to describe qualifying solar property in Sections 25D and 48, the PLR imposes a 100% cliff. It remains to be seen whether this signals a shift in the Service's thinking regarding the availability of the ITC for batteries and other dual-use property. Because this is a PLR, it cannot be relied upon as precedent when attempting to take a certain tax position. The industry may seek additional clarity through more broadly applicable rulings (for example a comparable finding for commercial solar property under Section 48, as discussed previously) that contemplate a diversity of fact patterns with respect to storage technologies. ———————————————
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