IRS has privately ruled that a taxpayer's roof-mounted systems that converted solar energy into electricity were tax-credit-eligible energy property under Code Sec. 48(a)(3), except to the extent that Reg. §1.48-9 required that a portion of the property's basis be allocable to any part of the property that performs the function of a roof.
Background on the energy credit. Code Sec. 48(a) provides for an energy credit equal to 30% of the cost basis of qualifying energy property placed in service before Jan. 1, 2017. Code Sec. 48(a)(3)(A)(i) provides that energy property includes equipment which uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat, excepting property used to generate energy for the purposes of heating a swimming pool. Reg. §1.48-9(a)(2) provides that in order to qualify as “energy property” under Code Sec. 48, property must be depreciable property with an estimated useful life when placed in service of at least three years and be constructed after certain dates.
In general, energy property includes solar energy property. “Solar energy property” includes equipment and materials (and parts related to the functioning of that equipment) that use solar energy directly to (i) generate electricity, (ii) heat or cool a building or structure, or (iii) provide hot water for use within a building or structure. Generally, those functions are accomplished through the use of equipment such as collectors (to absorb sunlight and create hot liquids or air), storage tanks (to store hot liquids), rockbeds (to store hot air), thermostats (to activate pumps or fans which circulate the hot liquids or air), and heat exchangers (to utilize hot liquids or air to create hot air or water). Property that uses, as an energy source, fuel or energy derived indirectly from solar energy, such as ocean thermal energy, fossil fuel, or wood, is not considered solar energy property. (Reg. §1.48-9(d)(1)) Solar energy property includes equipment that uses solar energy to generate electricity, storage devices, power conditioning equipment, transfer equipment, and parts related to the functioning of those items. Solar energy property, however, does not include any equipment that transmits or uses the electricity generated. (Reg. §1.48-9(d)(3))
Generally, buildings and structural components do not qualify as “section 38 property” for purposes of the investment tax credit. (Reg. §1.48-1(e)) However, Reg. §1.48-9(b) provides that structural components of a building may qualify for the energy credit. The term “structural components” includes parts of a building such as walls, partitions, floors and ceilings, as well as any permanent coverings such as paneling or tiling; windows and doors; all components (whether in, on, or adjacent to a building) of a central air conditioning or heating system, including motors, compressors, pipes and ducts; plumbing and plumbing fixtures, such as sinks and bathtubs; electric wiring and lighting fixtures; chimneys; stairs, escalators, and elevators, including all components thereof; sprinkler systems; fire escapes; and other components relating to the operation or maintenance of a building. (Reg. §1.48-1(e)(2))
Under an exception to the investment tax credit structural component rule, a structural component of a building, which is so specifically engineered that it is in essence part of the machinery or equipment with which it functions, qualifies for the investment tax credit even though it may also serve as a building component. (Rev Rul 79-183, 1979-1 CB 44)
Facts. Taxpayer installs roof-mounted systems that convert solar energy into electricity. This article refers to these systems collectively as “Solar Panels”—although the specific designation (or description) of Taxpayer's product is redacted in the private letter ruling (PLR). Taxpayer doesn't sell separate components of the system, but rather sells all three components as a single system. Although its business includes the sale and installation of the Solar Panels on customers' roofs, Taxpayer has also installed this product on its own roof. Taxpayer intends to claim the investment tax credit on its return and asked IRS to rule that the Solar Panels are “energy property” for purposes of Code Sec. 48(a)(3).
Taxpayer-friendly PLR. In the PLR, IRS ruled that the Solar Panels were energy property under Code Sec. 48(a)(3), except to the extent that Reg. §1.48-9 required that a portion of the property's basis be allocable to any part of the property that performs the function of a roof—e.g., protection from rain, snow, wind, sun, hot or cold temperatures or structural support or insulation.
The PLR reasoned that although structural components of buildings are generally excluded from the definition of “section 38 property” for purposes of the investment tax credit, the Solar Panels had been specifically designed and engineered for Taxpayer's commercial building. Further, even though Taxpayer manufactures, distributes and installs the Solar Panels as separate components, they are integrated and inseparable components of a single system.
References: For the business energy credit, see FTC 2d/FIN ¶L-16401; United States Tax Reporter ¶484; TaxDesk ¶381,601; TG ¶14904. For the investment tax credit dual purpose structural component exception, see FTC 2d/FIN ¶L-17241.