I found some clarity on this 5-year issue here: Batteries and Tax Credits
The way I read this is that you claim the credit entirely in the first year, but if it falls below the thresholds prescribed in the following 4 years, you must return the credit as prescribed.
However, all of these rulings are under Section 48 of the Tax Code for solar equipment put to business use. Residential solar tax credit falls under Section 25D and there have been no IRS rulings under that section of the tax code.
The third private ruling was issued to a solar rooftop company.
The company installs batteries on the same side of the inverter as the solar rooftop systems. The batteries have four possible uses: to store excess solar electricity from the rooftop solar system, store grid electricity at off-peak rates for use during peak hours, reduce demand charges and earn revenue by providing regulation services to the grid. The solar company said it was unable to represent that the batteries would be used mainly to store excess electricity from the rooftop systems. As a consequence, the IRS said the batteries qualify for investment tax credits, but it imposed a “75% cliff.”
A “75% cliff” means that at least 75% of the electricity stored in the year the battery is put in service must come from the grid to be able to claim any investment tax credit. The actual tax credit is the percentage of solar electricity stored that year.
For example, if 80% of the electricity stored in the first 12 months after the battery is installed is solar electricity from the rooftop system, then a 24% investment tax credit — 80% of 30% — can be claimed on the battery. If the percentage drops in any of the next four years, then there is partial or full recapture of the unvested tax credits.
Investment tax credits vest ratably over five years. Thus, for example, if solar electricity accounts for only 75% of electricity stored in year two, then 5% (the 80% first-year use minus the 75% second-year use) of the unvested tax credit must be repaid to the US Treasury. The unvested credit in year two is 80% of the original 24% tax credit.
If the percentage drops below 75% in any of years two through five, then the entire unvested tax credit that year is recaptured.
The company installs batteries on the same side of the inverter as the solar rooftop systems. The batteries have four possible uses: to store excess solar electricity from the rooftop solar system, store grid electricity at off-peak rates for use during peak hours, reduce demand charges and earn revenue by providing regulation services to the grid. The solar company said it was unable to represent that the batteries would be used mainly to store excess electricity from the rooftop systems. As a consequence, the IRS said the batteries qualify for investment tax credits, but it imposed a “75% cliff.”
A “75% cliff” means that at least 75% of the electricity stored in the year the battery is put in service must come from the grid to be able to claim any investment tax credit. The actual tax credit is the percentage of solar electricity stored that year.
For example, if 80% of the electricity stored in the first 12 months after the battery is installed is solar electricity from the rooftop system, then a 24% investment tax credit — 80% of 30% — can be claimed on the battery. If the percentage drops in any of the next four years, then there is partial or full recapture of the unvested tax credits.
Investment tax credits vest ratably over five years. Thus, for example, if solar electricity accounts for only 75% of electricity stored in year two, then 5% (the 80% first-year use minus the 75% second-year use) of the unvested tax credit must be repaid to the US Treasury. The unvested credit in year two is 80% of the original 24% tax credit.
If the percentage drops below 75% in any of years two through five, then the entire unvested tax credit that year is recaptured.
The way I read this is that you claim the credit entirely in the first year, but if it falls below the thresholds prescribed in the following 4 years, you must return the credit as prescribed.
However, all of these rulings are under Section 48 of the Tax Code for solar equipment put to business use. Residential solar tax credit falls under Section 25D and there have been no IRS rulings under that section of the tax code.
