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Section 25D of the Internal Revenue Code allows an individual taxpayer a credit equal to 30 percent of the qualified solar electric property expenditures made during the tax year. For this purpose, qualified solar electric property is defined as property that uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the individual.
In PLR 201809003, the IRS ruled that a battery that is integrated into a solar energy system that uses only solar energy to charge the battery constitutes qualified solar energy property. Essential to the ruling, however, was the taxpayer’s representation that all energy used to charge the battery is from the solar energy system. The IRS determined that qualified solar energy property requires that only solar energy may be used to generate electricity by comparing the requirement for a Section 25D credit for qualified solar water heating property, which expressly requires that at least half of the energy used by that type of property is derived from the sun. According to the IRS, the purposeful choice by Congress to include that requirement for qualified solar water heating property, but to exclude it for qualified solar electric property, demonstrates the intention that the energy used by qualified solar electric property must be derived solely from the sun. As a result, according to the IRS, if any nonsolar energy is used to charge the battery, the battery would not qualify for the credit.
Nothing in the express language of the statute or legislative history, however, requires that result. The literal language β “property which uses solar energy to generate electricity” β could include any level of solar energy. Moreover, while not explicit, it appears that the residential solar energy property credit was modeled on the commercial energy investment tax credit under Section 48. That section allows an investment tax credit equal to 30 percent of the cost of the property that uses solar energy to generate electricity. In that case, however, the regulations expressly allow a pro rata portion of dual use equipment, which uses solar energy and another source of energy, to qualify as solar energy property as long as solar energy constitutes at least 75 percent of the total energy input in an annual measuring period. Despite the fact that the Section 25D credit uses language identical to that of the energy credit, the PLR made no reference to Section 48 or its treatment of dual use property. In 2015, the Treasury requested comments about whether dual use property should qualify for the energy credit and how much, but no further guidance has been issued, and the regulation has not been revoked.
While the private letter ruling is not binding on other taxpayers, it is an indication of the current thinking of the IRS and is likely to have a chilling effect on the inclusion of batteries in residential solar systems that have to rely in part on charging from the grid to be sure the system will be able to provide the full range of expected benefits, including managing peak usage. Without the tax credit, the net cost will be significantly higher.