In Private Letter Ruling 201809003 the IRS ruled that a taxpayer who added a storage battery to an existing solar energy system for which a credit had been claimed in a prior year qualified for the solar device credit under IRC §25D(a)(1). But the IRS noted that there was an important factor in the facts the taxpayer provided that allowed for the credit.
The transaction in question and what the taxpayer is installing on his/her property is described as follows:
You are purchasing an energy storage product from an installer that can be integrated into existing Solar Energy Systems as an additional Solar Energy System Component. The product is comprised of 1) an AC battery; 2) an inverter that will convert solar electricity between AC and DC so the battery can charge and discharge the solar electricity; 3) required wiring to interconnect the product into your current Solar Energy System Components and your dwelling unit; and 4) a software management tool that will monitor and control the charging and discharging of energy (collectively, the “Battery”). You represent that the Battery is AC coupled to any new or existing Solar Energy System. The Battery contains a meter with current transformers that monitor the solar production and grid import as well as internal meters within the Battery that monitor charge and discharge power. When the Battery is constrained to charge only from solar, the software monitors these signals (every 0.1 seconds) and controls the Battery such that charging only occurs when the Solar Energy System is producing energy and only up to the instantaneous solar power. Thus all energy that is used to charge the Battery can be effectively assured to come from the Solar Energy System. Your purchase price for the Battery will include the labor costs allocable to onsite preparation, assembly, and original installation of the Battery. You intend for the original installation of the Battery to be completed in Year 2. The Battery is expected to have a storage capacity of 13.5 kilowatt hours (“kWh”) and a power rating of 5 kilowatts (“kW”).
Software controls will ensure your Battery will store solar electricity generated by the PV Panel and use it a later point in time – either later in the day or at night. In addition, integrating the Battery into the other Solar Energy System Components will enable you to disconnect from the grid in the event of a grid outage and continue using solar electricity in compliance with electrical codes when other Solar Energy Systems without a Battery will be forced to cease operating. The remaining useful life of your Solar Energy System is expected to exceed the useful life of the Battery and, much like a typical inverter, the Battery will likely need to be replaced at some point during the remaining useful life of the Solar Energy System.
The IRS granted the taxpayer’s request that the service rule that the battery system qualified for the credit and that the fact it was installed in a year after the other components were installed would not bar the credit in the year the battery is installed.
But IRS noted that it was crucial that the battery system was designed so that it could only store energy generated by the solar system, stating:
Your representation that all energy that is used to charge the Battery can be effectively assured to come from the Solar Energy System is essential for this ruling. Section 25D(d)(1) of the Code includes as a requirement in its definition of “qualified solar water heating property expenditure” that at least half of the energy used by such property for such purpose is derived from the sun. The definition of “qualified solar electric property expenditure” under § 25D(d)(2) omits this language. Thus, the Congress purposefully chose to include a 50 percent usage requirement in the definition of “qualified solar water heating property”, but the Congress did not include such language in the definition of “qualified solar electric property.” This demonstrates that the Congress expects the energy used by a “qualified solar electric property expenditure” to be derived solely from the sun. Accordingly, 100 percent of the energy used by the Battery must be derived from the sun. If this is not the case, the Battery does not meet the definition of “qualified solar electric property” in the Code.
The last sentence of that paragraph makes clear that even very minimal use of the battery to store other energy would be fatal to the credit in the view of the author of this ruling. The homeowner may or may be willing to accept that limitation on the battery’s use to be able to claim the credit, but advisers faced with clients trying to claim such a credit must insure that the only source of power to the battery will be the solar system—or be ready to argue that this ruling is overly restrictive in its analysis.