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IRS Approves Tax Credit for Community-Shared Solar Project

September 9, 2015 By Cheryl Kaften

The Internal Revenue Service (IRS) has ruled that an owner of photovoltaic panels in an offsite, community-shared solar array is eligible to take advantage of one of the primary incentives offered to homeowners adopting solar—the 30 percent federal residential income tax credit available under Section 25D of the Internal Revenue Code, sometimes known in the industry as the “residential Investment Tax Credit (ITC).”

Community-shared solar allows electric customers to buy an interest in an offsite solar array and to receive credit on their electricity bills for their ownership interest. While the IRS’s recent Private Letter Ruling is only legally applicable to the individual taxpayer in question—a solar panel owner in Boardman Hill Solar Farm, a member-managed 150-kW off-site solar array in Vermont—the ruling is being called a positive development by community-shared solar participants and project developers.

The issue of whether a residential owner of solar panels installed in an off-site, community-shared, solar array qualifies for the residential ITC has been an area of legal uncertainty, creating some confusion in the marketplace. Working with stakeholders in Massachusetts and Vermont, and with attorneys in the Boston office of law firm Foley Hoag, LLP, the Clean Energy States Alliance (CESA), a national nonprofit coalition of public agencies and organizations working on clean energy issues, arranged for the submission of a Private Letter Ruling request to the Internal Revenue Service to help clarify this issue.

“This new Private Letter Ruling represents the first instance in which the IRS has publicly weighed in on the applicability of the residential ITC to an owner of solar panels in a shared, offsite array,” said CESA Executive Director Warren Leon, adding, “The ruling suggests that the IRS may be receptive to claims for the residential ITC when a project mirrors the structure used in this case.”

Community-shared solar has led to remarkable growth in residential solar because it allows those without roof space or solar access to participate in the solar market,” observed Rhone Resch, CEO of the Solar Energy Industries Association (SEIA). “This ruling helps pave the way for even more growth under the widely successful federal investment tax credit.”

Foley Hoag attorneys Nicola Lemay and Adam Wade provided the legal work leading to the issuance of the private letter ruling request and facilitated discussions with the IRS.

“Under the specific facts presented in this private letter ruling, the IRS has agreed with the individual taxpayer that his or her purchase of solar electric property that is part of a net-metered offsite solar installation with panels owned by multiple individuals qualifies for the section 25D tax credit,” said Foley Hoag Tax Department Chair Nicola Lemay.

“Although, by law, this letter ruling cannot be used or cited as precedent by other taxpayers, several cases acknowledge that a private letter ruling can be used as ‘persuasive authority’ or an ‘instructive tool,’” Lemay further noted. “In general, letter rulings like this one may also be used by the IRS in its own interpretations, including by IRS employees who might consider it in issuing letter rulings to similarly situated taxpayers.”

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