IRS Opens the Door to Expanded Use of Residential Section 25D Credit in Offsite Solar and Other Renewables Projects

by Foley Hoag LLP - Energy and Cleantech

The IRS has released new guidance (Notice 2013-70) (the “Guidance”) in the form of a Q-and-A interpreting tax credits available to individual taxpayers under IRC Section 25D (Residential Energy Efficient Property) (the “25D Credit”) and IRC Section 25C (Nonbusiness Energy Property). Particularly noteworthy are the Questions and Answers interpreting the eligibility of off-site installations and net-metering arrangements on individual taxpayers’ eligibility to take the 25D Credit, specifically Questions and Answers 25 and 26, the full text of which are copied below this post.

Like the IRC Section 48 Investment Tax Credit (the “ITC”), which has driven the rapid growth of residential installation of solar assets models by the likes of the SolarCity and others, the Section 25D Credit permits an owner of solar and other renewable energy and energy conservation equipment installed before January 1, 2017 to receive a 30% tax credit which can be applied against federal income taxes due by the owner and, if not used in full in the first year, carried over to future years’ federal income tax payments.  However, unlike the ITC, which is an investment tax credit available to taxpayers engaged in a trade or business, the 25D Credit is  statutory language authorizing the 25D Credit imposes an express requirement that qualified property must, e.g. in the case of solar, “generate electricity for use in a dwelling … used as a residence by the taxpayer.” With this requirement, many had concluded that electricity produced off site by a solar PV installation on someone else’s land and not at the taxpayer’s home cannot be considered as being “used” in that person’s dwelling; or can it? Actually, says the IRS in this Guidance, it can. As it turns out, if a taxpayer is “net-metering” electricity produced by solar PV not installed at his or her home, and the PV system meets other conditions, that taxpayer is not disqualified from taking the 25D Credit. (See Q-and-A number 26, below).

The express language of the guidance is drafted to narrowly apply to instances where a single taxpayer owns panels that are (1) installed offsite (2) are subject to a very specific type of net metering arrangement and (3) are not used to generate significantly more power than is consumed by that taxpayer at his or her home. Still, limited as it is, the Guidance appears to effect a change in policy that holds the potential for adding to the emergent legal support for community-owned or group-owned solar and other renewable energy projects. For instance, if the Guidance could be applied to permit multiple taxpayers to take the 25D Credit proportionately when they jointly own a solar project developed under a “solar garden” or another “community-solar,” “virtual net-metering” or similar model, this Guidance could represent the removal of a major impediment to the efficient use of the 25D Credit on such projects. It could also provide needed relief to developers of such projects who have been unable to efficiently monetize the ITC among participants in such projects due to passive activity loss limitation rules applicable to the ITC. Further analysis is merited, perhaps by requests to the IRS for application of this Guidance under Private Letter Rulings analyzing specific models of common ownership.

Note that, in its guidance, the IRS describes the contractual arrangement for net metering and adds the requirement that “[t]he contract [with the utility] states that the taxpayer owns the energy transmitted by the solar panels to the utility grid until drawn from the grid at his residence…” The devil may now lie even in the details of the utility’s net metering tariffs. Could customers in some utility territories benefit from this guidance while others might not? If so, this power ownership obligation is an unfortunate — and probably unnecessary – addition to link “usage” of power. Not all utilities’ net metering tariffs and contracts may be so clear as to who “owns” electric power delivered to the utility for net metering.

Other than determining how broadly the Guidance could be applied and nailing down the wording of particular eligible net metering tariffs, there remain other legal rules that must be navigated correctly to make community ownership and community-financing successful, not the least of which are securities laws (query whether crowd funding will make that process work more efficiently). And there do remain other risks involved in community owned solar, such as what happens when a participant exits before the payback point has been reached and how to manage admission of new participants. But those are not new issues for solar. Putting the Section 25D credit to better use for larger, shared systems makes good policy sense.

Here are the pertinent Qs-and-As:

Q-25: If a taxpayer installs solar electric property other than directly on the taxpayer’s home, may the taxpayer claim the § 25D credit?

A-25: Section 25D(d)(2) defines a qualified solar electric property expenditure, in part, as an expenditure for property that uses solar energy to generate electricity for use in a dwelling unit that is used as a residence by the taxpayer. Therefore, if solar panels that are not directly located on the taxpayer’s home use solar energy to generate electricity directly for the taxpayer’s home the taxpayer may claim the § 25D credit.

Q-26: A taxpayer purchases solar panels that are placed on an off-site solar array and connected to the local public utility’s electrical grid that supplies electricity to the taxpayer’s residence. The taxpayer enters into a direct contractual arrangement with the local public utility that supplies electricity to the taxpayer’s residence to allow the taxpayer to provide electricity to the grid using a net metering system that measures the amount of electricity produced by the taxpayer’s solar panels and transmitted to the grid and the amount of electricity used by the taxpayer’s residence and drawn from the grid. The contract states that the taxpayer owns the energy transmitted by the solar panels to the utility grid until drawn from the grid at his residence. Absent unusual circumstances, the panels will not generate electricity for a specified period  in excess of the amount expected to be consumed at the taxpayer’s residence during that specified period. Can the taxpayer claim the § 25D credit?

A-26: Yes. Section 25D(d)(2) defines a qualified solar electric property expenditure, in part, as an expenditure for property that uses solar energy to generate electricity for use in a dwelling unit used as a residence by the taxpayer. The taxpayer’s expenditure for off-site solar panels  under this type of contractual arrangement with a local public utility that supplies electricity to the taxpayer’s residence meets the definition of qualified solar electric property expenditure.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Foley Hoag LLP - Energy and Cleantech | Attorney Advertising

Written by:

Foley Hoag LLP - Energy and Cleantech

Foley Hoag LLP - Energy and Cleantech on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.