The Internal Revenue Service (IRS) recently issued a private letter ruling that may open the door for community solar investors to qualify for federal tax credits. The letter ruling applied to a case involving a Vermont taxpayer who had invested in a community solar project. Specifically, the taxpayer had purchased 10 solar panels of the jointly owned, 640-panel Boardman Hill Solar Farm. The ruling allows him to take a 30 percent credit on that investment. By allowing this credit, the IRS reduced the cost of his investment in the solar project from $8,746 to about $6,000.
Although the private letter ruling is specific to this individual taxpayer, it is significant for a couple of reasons. First, the ruling suggests that the federal tax credits designed to promote residential investment in solar are not limited to residential rooftop solar or even a solar project on that individual’s property. Second, the letter ruling clarifies prior guidance by the IRS that a taxpayer who only partially owns a solar project may qualify for tax credits. Lastly, the letter ruling could significantly boost community solar projects.
“Community solar” is a term used for a collaborative renewable energy arrangement that allows several energy customers to share the benefits of a single local solar power project. This type of solar arrangement may increase access to solar energy and to reduce up-front costs for participants. Community solar projects may also allow renters or condominium owners to partly own and benefit from solar. Additionally, community solar has additional advantages, including:
- Improved economies of scale
- Optimal project siting
- Increased public understanding of solar energy
- Local job generation
- Opportunity to test new models of marketing, project financing, and service delivery