Tax Credits for Storage After Solar or Wind?

By Elizabeth Crouse, Elias Hinckley and William Holmes

On Friday, March 2, the Internal Revenue Service released Private Letter Ruling (“PLR”) 201809003. The PLR is not binding precedent, but it indicates that the IRS will permit a taxpayer to claim a Code Section 25D credit in respect of a residential battery installed after the solar panels to which it will be attached was installed. In the PLR, the IRS expressly states that it will treat the battery as property that “uses solar energy to generate electricity,” provided only solar energy is used to charge it.

The PLR concerns individuals claiming a credit for a residential system, but don’t stop reading. This outcome matters for C&I and utility scale projects also.

Observers of the renewables industry know that the IRS has now published several rulings finding that batteries and similar storage devices qualify for the Investment Tax Credit under Code Section 48 (the “ITC”) when installed contemporaneously with the technology that gathers renewable energy and converts it to electricity, e.g., solar panels. To date, the available guidance has been less clear about whether the storage device could separately constitute ITC-qualified property. The PLR released on Friday points to a resolution of that debate because, in many ways, the credit under Code Section 25D is similar to that under Code Section 48. Both concern property that “uses solar energy to generate electricity.” Both are only available in respect of the year in which the relevant property is first used. Even better, there are Treasury Regulations under Code Section 48 that expressly contemplate storage as credit qualifying property. Although not clear, these Regulations arguably apply even if the storage asset is not placed in service at the same time as the solar panels or similar property that input energy to the storage asset.

In addition, because the PLR indicates that a battery may be ITC-qualified in addition to the qualified renewable power equipment that feeds energy to it, there is a possibility that the logic behind the PLR could be used to claim the ITC for storage systems installed at operating wind facilities (or other renewables facilities utilizing the PTC).

Each potential project should be carefully evaluated to determine if a storage solution may qualify for the ITC, as there is some risk that the IRS will refuse to extend the reasoning in the PLR to the ITC. However, the PLR presents a valuable opportunity to test the boundaries of the ITC in storage applications.