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IRS Issues Ruling Approving Energy Storage Retrofit for Solar Investment Tax Credit (ITC)

On March 8, 2018 the IRS issued a ruling included in a private letter to a solar customer that planned an installation of an energy product. The letter, with the customer anonymous and with the energy product not named, is available on the IRS website:

https://www.irs.gov/pub/irs-wd/201809003.pdf

While the energy product is not revealed, several parameters are, specifically:

"The Battery is expected to have a storage capacity of 13.5 kilowatt hours (“kWh”) and a power rating of 5 kilowatts (“kW”)."

That spec kind of gives the energy product away as those are the specs of a single Tesla PowerWall 2. The customer bought the battery and they wanted to integrate it into their existing solar energy system.

IRC § 25D, normally known as the Residential Energy Property Credit, is usually referred as the Solar ITC credit, and covers 30% of the expenditures made by a taxpayer during the year:

Residential Energy Property Credit (Section 25D) at a Glance

The ITC credit was approved, as long as, according to the IRS:

"When the Battery is constrained to charge only from solar, the software monitors these signals (every 0.1 seconds) and controls the Battery such that charging only occurs when the Solar Energy System is producing energy and only up to the instantaneous solar power. Thus all energy that is used to charge the Battery can be effectively assured to come from the Solar Energy System."

My assumption after reading this letter, is that if the PowerWall would charge at any time from the grid instead of solar, the ITC credit would be denied.

Notice that while the letter ends with "this ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the Code provides it may not be used or cited as precedent", anyone with a PowerWall installation can request a similar ruling.

The other important ruling that this letter revealed is that the solar installation and the energy unit(s) do not have to be purchased and installed in the same year, to get the Solar ITC credit on both.

Reading for the Tesla documentation at:

Functionality | Tesla

"When Powerwall is installed with solar, it is not currently able to charge from the grid. Powerwall installations on new and existing solar systems are designed to qualify for the Federal Investment Tax Credit, which requires 100% charging from solar."
 
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Quick question:

I believe the ITC is independent of the rebate, so wouldn't those installing the PW2 be effectively making money or effectively getting them for free? I believe installation of 2 PW goes for about $13.5K--30% ITC equates to roughly $4K. SGIP rebates for step 2 is about 8.2K. Does my math add up?
 

miimura

Well-Known Member
Aug 21, 2013
7,187
7,146
Los Altos, CA
Quick question:

I believe the ITC is independent of the rebate, so wouldn't those installing the PW2 be effectively making money or effectively getting them for free? I believe installation of 2 PW goes for about $13.5K--30% ITC equates to roughly $4K. SGIP rebates for step 2 is about 8.2K. Does my math add up?
My tax accountant told me that the ITC can only be applied to your final net cost after any rebates or other incentives. This has precedent with other solar incentives in the past. So, $13.5k - $8.2k SGIP = $5.3k Then, the ITC would be $1,590 leaving you with a net cost of $3,710.
 

cpa

Active Member
May 17, 2014
3,404
4,767
Central Valley
PLRs are not statutory authority. They are not case law. Accordingly, the courts and even the IRS examiners do not have to abide by these rulings. They do serve to explain the IRS interpretation of the law as it applies to unusual or new circumstances or situations that were not contemplated by Congress.

The only intrinsic value to PLRs is that the "taxpayer may rely" on this written communication from Washington to avoid any negligence or other statutory penalties for understatement of tax or non disclosure of a required item.

Have the courts rejected PLRs in the past? Yes. But those are very few and very far between.

In all reality, a small tax credit on an individual return will not be litigated. But a large credit on a commercial venture with hundreds of thousands of dollars at stake might be subject to more scrutiny and possible litigation if the powers that be feel it is a worthy area to pursue.
 
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PLRs are not statutory authority. They are not case law. Accordingly, the courts and even the IRS examiners do not have to abide by these rulings. They do serve to explain the IRS interpretation of the law as it applies to unusual or new circumstances or situations that were not contemplated by Congress.

The only intrinsic value to PLRs is that the "taxpayer may rely" on this written communication from Washington to avoid any negligence or other statutory penalties for understatement of tax or non disclosure of a required item.

Have the courts rejected PLRs in the past? Yes. But those are very few and very far between.

In all reality, a small tax credit on an individual return will not be litigated. But a large credit on a commercial venture with hundreds of thousands of dollars at stake might be subject to more scrutiny and possible litigation if the powers that be feel it is a worthy area to pursue.

And you can also write the IRS for a PLR and get your own ruling. And like you say, the IRS is not going to litigate such small amounts anyway.

I think that it is interesting to note the additional statement from Tesla:

"When Powerwall is installed with solar, it is not currently able to charge from the grid. Powerwall installations on new and existing solar systems are designed to qualify for the Federal Investment Tax Credit, which requires 100% charging from solar."

I.e. the Tesla app and all Powerwall firmware does not allow you to charge the battery from the grid, when you also have solar. Period!
 
My tax accountant told me that the ITC can only be applied to your final net cost after any rebates or other incentives. This has precedent with other solar incentives in the past. So, $13.5k - $8.2k SGIP = $5.3k Then, the ITC would be $1,590 leaving you with a net cost of $3,710.

It is interesting to note that the largest Tesla Powerwall Certified Installer, Swell, in their quote will list the SGIP and the ITC, with the latter calculated on the total amount, not the SGIP-discounted amount.

Now, I believe Swell is incorrect. Quoting from Title 26 - § 136, Energy conservation subsidies provided by public utilities, available at:

Title 26 - § 136

"(a) Exclusion
Gross income shall not include the value of any subsidy provided (directly or indirectly) by a public utility to a customer for the purchase or installation of any energy conservation measure.

(b) Denial of double benefit
Notwithstanding any other provision of this subtitle, no deduction or credit shall be allowed for, or by reason of, any expenditure to the extent of the amount excluded under subsection (a) for any subsidy which was provided with respect to such expenditure. The adjusted basis of any property shall be reduced by the amount excluded under subsection (a) which was provided with respect to such property."

Which means that you do not have to declare the SGIP as part of gross income, but you are denied the "double benefit" of using it to reduce the total cost to be used for ITC calculation.
 
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cpa

Active Member
May 17, 2014
3,404
4,767
Central Valley
Re: PLRs--

The IRS keeps moving the goalpost with their fees. The Service does assess fees associated with these requests. The most recent info that I could dig up is from 2015. That fee was $2,200 if gross income is <250K. It increases to $6,500 if income is between 250K and 1 million. You don't want to know what the fee is if your income is > $1 million.

Chances are that the fee alone is equal to or greater than your tax benefit.
 
Re: PLRs--

The IRS keeps moving the goalpost with their fees. The Service does assess fees associated with these requests. The most recent info that I could dig up is from 2015. That fee was $2,200 if gross income is <250K. It increases to $6,500 if income is between 250K and 1 million. You don't want to know what the fee is if your income is > $1 million.

Chances are that the fee alone is equal to or greater than your tax benefit.

Wow!! I'll take my chances and take the credit with no letter.
 
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So... in April my accountant told me I was not eligible for the credit on my batteries. He mentioned something about the electric vehicle credit I was already getting. It was the 11th hour so I didn't argue with him. I emailed him today to reopen the question and here was his answer:

"What you are reading is incorrect. You are subject to AMT in 2017 and as a result ineligible to claim the credit.
I’m happy to go over it but that is pretty much all you need to know."

Anyone else out there in a similar boat with this issue?
Thanks
 
So... in April my accountant told me I was not eligible for the credit on my batteries. He mentioned something about the electric vehicle credit I was already getting. It was the 11th hour so I didn't argue with him. I emailed him today to reopen the question and here was his answer:

"What you are reading is incorrect. You are subject to AMT in 2017 and as a result ineligible to claim the credit.
I’m happy to go over it but that is pretty much all you need to know."

Anyone else out there in a similar boat with this issue?
Thanks
I think your accountant is not well informed. This tax credit is just like EV credit and has nothing to do with AMT
 

boaterva

Well-Known Member
Supporting Member
I agree with @prash

To add on to the above, I went back to last year's tax return and added a fake $40,000 solar system and it ate up all the extra 'fake AMT' (that was there but that I wasn't subject to') giving me a $10,500 refund add-on and rolled about $1,500 to next year since you can rollover excess.

That is, the ITC and the EV Car Credit are not subject to AMT that is calculated but you are not paying. However, the Alternative Fuel (charging) credit is. I had the whole 'benefit' of that eaten by the 'AMT that was calculated but not due' (I forget the actual term for this, sorry).

IANATA (but my father was... :D ).
 
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jackbowers

Jack Bowers
Aug 23, 2009
275
461
I don't think there's a form, it's a solar energy credit under IRC 25D. In an earlier document (prior to the latest ruling) the IRS described it as a credit that works even if you are subject to AMT:

https://www.irs.gov/pub/irs-drop/n-13-70.pdf

Spidel's (a tax newsletter) recently ran a blurb on the recent ruling under the title, "Home batteries can be eligible for solar credits." With Tesla going on record that they meet the technical requirements, I can't see any reason not to claim the credit once the installation is done and verified.
 
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Thanks so much for the input. Everything you guys are saying is exactly whet I've been reading.
I think I will just amend my returns directly to the IRS. If they come back and say "no" due to AMT, I'll keep my accountant. If they say "yes"... he's gone! Maybe he's got too many high end clients and didn't want to waste his time :)
 

cpa

Active Member
May 17, 2014
3,404
4,767
Central Valley
Thanks so much for the input. Everything you guys are saying is exactly whet I've been reading.
I think I will just amend my returns directly to the IRS. If they come back and say "no" due to AMT, I'll keep my accountant. If they say "yes"... he's gone! Maybe he's got too many high end clients and didn't want to waste his time :)

Looks like you will be seeking a new accountant. (I am not trolling here--honest.) The odds are quite good that he/she has not encountered this situation before, and went off memory and did little to no research. The odds are also good that he/she delegated this task to a staff person with little experience, particularly in an area like this.

Chances are that your amended return will sail through without audit or challenge. The IRS is woefully understaffed and under educated about such matters. I would attach your invoice, your cancelled check/credit card statement to prove payment, and a copy of the relevant code section. Allow up to 20 weeks for processing and your refund, including interest. I would also attach a copy of my return as originally filed as well as a proforma return with the additional credit claimed, both labeled clearly. The easier it is for a clerk to verify your information, the quicker your return will enter the pipeline for adjustment.
 

boaterva

Well-Known Member
Supporting Member
Looks like you will be seeking a new accountant. (I am not trolling here--honest.) The odds are quite good that he/she has not encountered this situation before, and went off memory and did little to no research. The odds are also good that he/she delegated this task to a staff person with little experience, particularly in an area like this.

Chances are that your amended return will sail through without audit or challenge. The IRS is woefully understaffed and under educated about such matters. I would attach your invoice, your cancelled check/credit card statement to prove payment, and a copy of the relevant code section. Allow up to 20 weeks for processing and your refund, including interest. I would also attach a copy of my return as originally filed as well as a proforma return with the additional credit claimed, both labeled clearly. The easier it is for a clerk to verify your information, the quicker your return will enter the pipeline for adjustment.
I don’t even know if all of that is needed. Do you normally need to prove all that? For the EV reimbursement, there’s no proof required. Do they know you own it from the VIN?

Perhaps in more mundane hardware purchases it’s better to supply invoices/payment as in the PW case here? Trying to see what’s a good idea here vs. other cases, seriously.
 

cpa

Active Member
May 17, 2014
3,404
4,767
Central Valley
I don’t even know if all of that is needed. Do you normally need to prove all that? For the EV reimbursement, there’s no proof required. Do they know you own it from the VIN?

Perhaps in more mundane hardware purchases it’s better to supply invoices/payment as in the PW case here? Trying to see what’s a good idea here vs. other cases, seriously.

Ya gotta remember that I wear both a belt and suspenders, and my sleeve garters keep my shirt sleeves from smearing the ink in the books of account.

Levity aside, the last thing that I want to have happen to my client is to become pen pals with the Service. I want to make the Service's job easy. So, I attach as much salient information as I possibly can in order for the clerk who processes these amended returns to keep them moving along smoothly in the pipeline. It is also easier on the memory and the filing system if a complete set of documentation accompanies the amended return. I loathe getting a call from a client and having him search for more documentation 16 weeks after I prepared the amended return.

Amended returns are sometimes returned to the taxpayers requesting more information. Sometimes they are referred to audit for additional investigation. I would prefer that this not happen so I give them as much information as I feel is necessary to avoid further correspondence until the refund paperwork arrives in the mail.

I really do not know how amended returns are processed. I guess that there is a de minimus threshold for a refund claimed. Beyond this alleged threshold, who knows?
 

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