The Internal Revenue Service issued a private letter ruling this week to an individual owner of solar panels installed in an off-site net-metered community solar garden.  In the Ruling, the Service confirmed the individual’s eligibility to claim the residential income tax credit for 30 percent of qualified solar electric property expenditures pursuant to Section 25D of the Internal Revenue Code.

The Ruling is significant in several respects:

1. it confirms that an individual who owns only some of the solar panels and other property comprising a community solar garden may claim the credit,
2. it appears not to require direct tracking of the electricity produced by the taxpayer’s solar panels and, instead, permits allocation of the aggregate amount of electricity produced by the array based on the number of panels owned by the taxpayer, and
3. it does not require the taxpayer to contractually agree with the utility that the taxpayer owns the electricity produced by the taxpayer’s panels until drawn from the grid at his residence.

Code Section 25D provides a tax credit equal to 30 percent of the qualified solar electric property expenditures made by an individual taxpayer.  “Qualified solar electric property expenditure” means an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer.  In prior guidance, Notice 2013-70, Q/A-26 (the “Notice”), the Service stated that a taxpayer who purchases solar panels and places them on an off-site solar array may claim the credit under Section 25D.  The Notice is limited in several ways.  First, it is not clear from the Notice whether a taxpayer who owns only some of the solar panels installed on a solar array is eligible to claim the residential credit.  Second, the Notice only applies to situations in which the net metering system directly measures the electricity produced by the taxpayer’s panels.  Third, the Notice only applies where the taxpayer enters into a contract with the local utility that provides that the taxpayer owns the energy transmitted by the solar panels to the grid until drawn from the grid at the taxpayer’s residence.

The Ruling appears to clarify the Service’s position on these issues.  The taxpayer in the Ruling purchased solar panels and a partial ownership interest in the racking equipment, inverter equipment, and wiring and other equipment.  The utility calculated a net metering credit based on the aggregate amount of electricity produced and delivered by the solar array and a separate entity of which the taxpayer was a member provided information to the utility to enable the utility to allocate the aggregate credit among the owners, including the taxpayer.  Presumably this allocation was based on the number of solar panels in the array that were owned by the taxpayer.  The Ruling did not require that the taxpayer contractually agree with the utility that the taxpayer owns the electricity produced by the taxpayer’s panels until drawn from the grid at his residence.

With the proliferation of community solar programs in many states, the Ruling provides some clarity regarding the Service’s position on off-site solar arrays and the Code Section 25D credit.  However, as with all private letter rulings, the Ruling is based on the specific facts provided by the taxpayer and applies only to the requesting taxpayer.  The Ruling cannot be relied upon, used or cited as precedent by other taxpayers.  The Service has not yet provided the Ruling’s release number.