James Montgomery, Associate Editor, RenewableEnergyWorld.com
August 21, 2013 | 6 Comments
New Hampshire, USA -- Do feed-in tariff structures, as an alternative to net metering, unexpectedly strip U.S. homeowners of tax benefits while exposing them to more federal taxes? This interpretation, specifically in response to Arizona Public Services' recently proposed changes in Arizona, could affect similar programs across the country that try to assign a value and compensation to residential solar energy.
Days ago Arizona Public Service proposed changes to its net metering policy, offering two alternatives: add a monthly charge for residential solar homeowners' "use of the grid," or restructure the mechanism to a "buy-all/sell-all" scenario (with payments to homeowners reduced to around a third of current net-metering rates). Protests were quick and loud; the Alliance for Solar Choice (TASC) has called it "a choice of two poisons" for residential solar in Arizona.
And now TASC is upping the ante, claiming in a filing with the Arizona Corporation Commission (ACC) that APS' "buy-all/sell-all" proposal both takes away tax credit eligibility and exposes unsuspecting solar homeowners to higher federal taxes. "It's almost inconceivable that APS proposed it," scolds Bryan Miller, president of TASC, which commissioned the study from the tax firm Skadden Arps Slate Meagher & Flom LLP. (He's also VP of public policy and power markets for Sunrun.)
According to their interpretation, the buy-all/sell-all FIT can be interpreted as two separate transactions: homeowners selling the electricity their rooftop system generates to the utility, and the utility selling electricity back to the customer for consumption. Technically, then, the electricity isn't used directly in the residence to offset the load, and thus it no longer qualifies for the 30 percent Section 25D credit that requires a solar electric property to generate electricity "for use in a dwelling unit." Section 25D also requires taxpayers to use 80 percent of the electricity generated by the system, but again if by definition all of it is transferred up to the utility first the homeowner wouldn't qualify on these grounds either.
Moreover, says the firm, FIT payments to the homeowner would be considered gross income. This interpretation, they say, is validated by Senate bill S.1225, which seeks to provide income exclusion for transactions to the grid if the Section 25D Credit doesn't exceed the value of the electricity used at the residence annually. Absent such income exclusion, gain from the sale of electricity would constitute gross income — and be federally taxable.
So how much of this is real? "The IRS hasn't been as clear as we'd like" in understanding how to tax net metering offsets vs. sales of power in a residential setting, explains Lee Peterson, senior manager at CohnReznick. How such income would be designated as taxable is also unclear, whether as taxable income (vs. trade of business income) that might depend on the nature of the contract between homeowner and utility. "Most programs ignore it. The last thing they consider is the tax impact on the customer," he said. "Many utilities just issue IRS forms 1099 to their customers, and leave it to the customer to figure out whether it's taxable or not." In fact many customers might be paying taxes they technically wouldn't owe, he added. Peterson points out the Georgia Power's ASI small-system power purchase agreements include "bold-type language" that clarifies that customers know the income they get from a 20-year PPA payment stream is taxable. "A PPA is not a FIT payment, but the issues are similar," he said.
Homeowners, who by this FIT legal interpretation would be ineligible for the Section 25D credit, would not be eligible for the 30 percent investment tax credit (ITC) either, according to Miller. But Peterson counters that's only if the arrangement between homeowner and utility rose to the level of trade or business would the 25D credit be in jeopardy, and if so that would open the door to use the commercial version (section 48) of the 30 percent ITC. John Marciano with Chadbourne & Parke points out that the section 48 business tax credit "is a little harder to use, prone to recapture and potentially unavailable to homeowners that may not be in the U.S. on a permanent resident or citizen status," such as the common scenario of Canadian citizens coming down for the winter.
Miller claims that TASC "didn't want to have to file" this FIT interpretation, because of the "very difficult questions it will raise" about other programs nationwide that dodge net metering with feed-in tariff or "value of solar tariff" programs, from California (LADWP, SMUD, Palo Alto) to Texas (Austin) to Georgia (Georgia Power) to Virginia (Dominion). Still, he acknowledged that this type of pushback TASC is pursuing was "inevitable," noting that efforts to shifting away from net metering to such FIT structures have been pursued by California utilities for some time.
Marciano agrees that this is just one more tactic by utilities to push back against residential generation. He cited one Arizona utility that sought an IRS ruling that a state program's payments to homeowners for installing systems should be taxable, arguing that rather than as an incentive to install energy efficient equipment it was really "a prepaid forward for RECs." California utilities, meanwhile, are trying to get homeowners to pay fees equal to the savings they'd enjoy before allowing interconnection to the utility grid.
"Utilities should be ashamed of themselves for pushing a policy that would result in that taxation," TASC's Miller chastised.
Lead image: Signature of business contract in front of solar panels, via Shutterstock