Taxes and Solar Energy Rebates, Incentives, and Grants
ARE SOLAR REBATES AND GRANTS FOR HOMEOWNERS AND BUSINESSES TAXABLE?
Financial incentives for solar installations are available in a growing number of states.
Million Solar Roofs partners have questioned whether or not such grants and rebates are taxable at the federal or state level. If these incentives are taxable, it could mean as much as a 42% increase in a
photovoltaic (PV) system's net cost for a homeowner relative to a case where the incentive is nontaxable.
Although there is strong evidence that residential incentives from utilities are nontaxable but those for commercial consumers are taxable, there are no clear guidelines on the tax treatment of state government rebates or grants. However, given the federal tax incentives available to businesses, and the rules against "double-dipping," the taxation of business incentives may actually help a project's bottom line.
Note: The authors are not credentialed to give tax advice! We urge incentive recipients to consult their tax advisor.
Supported primarily by public benefits funds, nearly 20 states offer rebates or grants for PV projects; in about half of these states, solar water heating projects are also eligible for incentives.
In addition, over two-dozen utilities in 10 states provide customer rebates for PV and/or solar water heating installations. These programs, many of which have been established within the last several years, can play a significant role in solar deployment. The uncertainty over the taxability of incentives has plagued the solar market in some areas of the country. The confusion has likely caused many system buyers to pay taxes they weren’t obligated to pay, and may have soured some otherwise satisfied early adopters. In many cases, rebates and grants are designed to allow system owners to break even; taxing the incentive could significantly reduce the benefits of these programs. Million Solar Roofs partners, in an effort to maximize the benefits of incentive programs and other market transformation strategies, are seeking clarity on the tax treatment of incentives. An informal survey of state incentive program administrators revealed that they are uncertain of the tax treatment of incentives and feel they have not received clear guidance on the issue. In some cases, state officials noted that even though the agency was unsure about taxability, an Internal Revenue Service (IRS) form 1099-G "Certain Government Payments"
is sent to incentive recipients as a matter of policy implemented by the state's legal council.
There are several reasons that this practice/policy of "when in doubt, send a 1099-G out" should probably be challenged. First, unfortunately, many tax filers may claim all 1099 incomes without asking questions. Second, this policy seems to contradict the instructions for Form 1099-G, which directs federal, state or local government agencies to report taxable grants:
Agencies required to file Form 1099-G must furnish a copy of the form or acceptable substitute statement to each recipient. Yet, it appears that some agencies are not sure whether the incentive payments are actually taxable.
Third, any organization that administers a federal, state or local governmental program that provides a nontaxable energy grant to a business must file a form with the IRS, implying that some incentives may indeed be nontaxable:
This is used for business entities (including a sole proprietor). Section 38 property refers to the 10% business energy investment credit for solar and geothermal property as defined in Section 48. The value of a nontaxable grant must be subtracted from the equipment cost before calculating the tax credit. However, there is no requirement to tell the recipient that the grant is nontaxable.
Fourth, incentive programs can (and probably should) be designed to avoid any possibility that incentives are subject to federal tax.
Finally, the results of digging into tax law and questioning the IRS suggest that residential incentives (rebates, grants) may not be taxable under certain conditions. In contrast, businesses may actually have a greater overall tax advantage by claiming incentives as taxable income.
The bottom line is that solar purchasers should be advised not to assume that their incentive is taxable just because they receive a 1099-G documenting the incentive amount.
Note, however, that the tax code is clear that state tax credits are considered taxable income for federal tax purposes. These credits are basically state taxes that an individual or business did not have to pay, and therefore, remain part of gross income for federal tax purposes.
State Incentives
State incentive programs that provide a taxable grant or other type of subsidy are required to inform recipients that the incentive is taxable. However, the tax code is unclear as to whether or not state government incentives are taxable. It may be reasonably argued, however, that these incentives are nontaxable for residential customers.
For example, since most state incentive programs are funded by system benefits charges collected by utilities and based on
electricity usage, or established through utility settlements, one could reasonably conclude that these solar subsidies do come "indirectly" from a utility. Of course, it depends on what the IRS definition of "indirectly" is.
Some states have designed their programs to avoid the taxability issue. The Sustainable Development Fund in Pennsylvania, for example, designed a PV grant program to avoid taxation of the up-front portion of the incentive for the system owner by having the approved contractor receive the incentive and take it off the bottom-line cost to the consumer. Oregon's PV buydown is similarly structured. This mechanism avoids direct government payments to consumers. In contrast, other programs, including those in Illinois and New Jersey, send checks directly to the consumer.
What about incentives offered by state agencies via oil overcharge funds or state appropriations (not directly or indirectly from a utility)? One example is Vermont's new wind and solar incentive program. When queried about tax treatment of government subsidies for solar or conservation projects, IRS telephone and e-mail assistance provided conflicting information.
Yet another tax provision may provide rationale for considering an incentive nontaxable in cases where a solar contractor who is considered a "dealer" provides a rebate to his or her customer: A cash rebate from a dealer or manufacturer is not considered taxable income, an exemption originally intended for car dealer rebates. Thus, in states where customers receive rebate checks from solar "dealers," one could argue that this cash rebate is nontaxable. In Vermont's case, program participants can choose to receive the incentive payment directly or through their contractor. Receiving the incentive through the contractor as a buy down of the installation cost or cash back may be the best option:
Example. You buy a new car for $9,000 cash and receive a $400 rebate check from the manufacturer. The $400 is not income to you. Your basis in the car is $8,600. This is your basis on which you figure gain or loss if you sell the car, and depreciation if you use it for business.
Tax Treatment of Incentives at the State Level:
States may handle the taxability question differently than the federal government. Some states have very clear language in their tax code. For example, California has language in the state's "Revenue & Taxation Code" stating that the solar rebates and incentives are not taxable for homeowners or businesses:
17138.1. Gross income does not include anyamount received as a rebate, voucher, or otherfinancial incentive issued by the California EnergyCommission, the Public Utility Commission, or alocal publicly owned electric utility, as defined insubdivision (d) of Section 9604 of the PublicUtilities Code, for any expenses paid or incurredby a taxpayer for the purchase or installation ofany of the following devices: (a) A thermal systemas defined in Section 25600 of the PublicResources Code. (b) A solar system as defined inSection 25600 of the Public Resources Code. (c) Awind energy system device that produceselectricity. (d) A fuel cell generating system, asdescribed in the California Energy Commission'sEmerging Renewable Resources AccountGuidebook, that produces electricity.
In contrast, other states, including Rhode Island and Illinois, follow the federal tax code to derive taxable income. The bottom line is that industry should advise their consumers to ask questions of their state or local government and of the IRS. Getting a 1099-G for the incentive amount does not necessarily mean the incentive is taxable.
CONCLUSIONS:
The research presented indicates that residential solar incentives provided by utilities are not subject to federal income tax. However, enough uncertainty remains regarding the taxability of state government incentives that definitive rulings on this issue are necessary to protect consumers and allow incentive program managers to design payment options that are the most advantageous to consumers.
The question of taxability for solar incentives for businesses is more complex, and there are situations where it may be a tax advantage to the business to claim the incentive as taxable income. The only thing that is clear is that the federal tax law should be clarified about how government incentive payments for solar installations should be handled.
REFERENCES:
1. IRS Form 1099-G Instructions,http://www.irs.gov/pub/irs-pdf/i1099g.pdf
2. IRS Form 6497 Instructions,GO TO http://www.irs.gov/pub/irs-pdf/f6497.pdf
3. Clean Power Research, GO TO http://www.cleanpower.com/nrelpv
4. IRS Publication 525, 2003 Taxable and Nontaxable Income Catalog Number 15047dGO TO http://www.irs.gov/pub/irs-pdf/p525.pdf
5. California Revenue and Taxation Code on line athttp://www.leginfo.ca.gov/cgibin/calawquery?codesection=rtc&codebody=&hits=206. IRS Publication 946 2003 How to Depreciate Property Catalog Number 13081Fhttp://www.irs.gov/pub/irs-pdf/p946.pdf
7. Systemic Advocacy Management System (SAMS) "As an independent organization within the IRS, we help taxpayers solve problems with the IRS and recommend changes that will prevent the problems."GO TO http://www.irs.gov/advocate/article/0,,id=117703,00.html