SOLAR TODAY - March 2011

| solar incentives advances
irs Provides guidance for residential Pv
By MARC SCHULTZ and
FRANC DEL FoSSE

the authors want you to know that this article should under no circumstance be construed as providing tax advice. marc schultz is a tax partner with snell & wilmer ( swlaw.com), a law firm with eight offices across the southwest. he chairs the firm’s tax credit finance practice and co-chairs the firm’s fund formation and investment practice. franc Del fosse is a transactional partner with snell & wilmer. he chairs the firm’s renewable energy industry group.

Because renewable portfolio standard incentives vary widely from state to state, residential solar integrators and installers conducting operations in more than one state may have a challenge with quantifying the incentives available to their residential customers. One might assume that the easy part would be quantifying the federal income tax credit portion of the incentive package. However, the amount of income tax credits available to a homeowner depends on the income tax treatment of the state incentives received. Fortunately, a recent private letter ruling provides more guidance from the IRS.

Last year, with the assistance of the solar integrator American Solar Electric, we sought an IRS private letter ruling for an Arizona taxpayer who was seeking clarity from the IRS on applicable federal income tax credits. The ruling, PLR 201035003, sheds light on the thought process of the IRS in calculating the federal income tax credit pursuant to Section 25D of the Internal Revenue Code. Section 25D provides that an individual who purchases a residential solar system is eligible for a federal income tax credit equal to 30 percent of the cost of that system. In addition, many states with a renewable portfolio standard have a program by which an incentive is paid by the local utility to residents who purchase and install a residential solar system.

The facts and circumstances of a particular state’s
subsidy or incentive program are crucial to determining
the tax implications of such payments and the applicable
federal income tax credit. For instance, payments received
from a utility are generally subject to income tax. How-
ever, Section 136 of the Internal Revenue Code provides
that a “subsidy” from a public utility to a customer for
the purchase or installation of an energy-conservation
measure is not considered gross income to the taxpayer.
Ideally, a homeowner would like to receive both the pay-
ment from the utility on a tax-free basis and the federal
income tax credit on the full purchase price of the system.
To prevent such “double dipping,” Section 136 provides
that the base on which the Section 25D tax credit is deter-
mined must be reduced by the amount of any payment
from a public utility that is excluded from gross income
pursuant to Section 136.

Large-scale power storage has long been cited as a goal to even out the intermittency of solar and wind power. In Hawaii, massive bat- tery banks are now becoming standard operating procedure for wind and solar esources serving small isolated grids. In January, Kaua’i Island Utility Cooper-
ative (KIUC) agreed to purchase a 1.5 -MW
utility-scale battery storage system from
Xtreme Power of Kyle, Texas, to be installed at the
Koloa substation. This battery bank will smooth out
the power feed from a 3-MW photovoltaic project as
clouds pass over, helping to stabilize the utility’s rela-
tively small grid. Also in January, Xtreme announced
the sale of a 10-MW storage system to serve a 21-MW
wind farm to be built on Maui. Both systems will
come online later this year.

The sales mark the fourth and fifth large battery systems sold by Xtreme in Hawaii. Battery banks are already in place to serve wind farms on Maui, Lana’i and Oahu. The new systems will bring installed battery capacity to 30 MW.