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Copyright © 2012 Albuquerque Journal
Homeowners considering whether to go solar with rooftop installations to reduce their electric bills need to consider tax implications.
If your earnings from the solar system tops $600 a year, you must tell the U.S. government in your income tax filing.
Since 2007 when the Public Service Company of New Mexico introduced its customer solar incentive program, the company has paid participants for what are called renewable energy certificates, or RECs, associated with the energy produced. RECs document the renewable energy the utility has obtained to comply with the state’s renewable energy requirements – in effect, it pays you to help it meet the state mandate.
For customers with typical rooftop systems, REC payments originally started at 13 cents per kilowatt-hour generated, but as the cost of solar decreased over time, the payments also have decreased. They are currently at 5 cents a kilowatt-hour. They would eventually decrease to 2.5 cents, according to a filing by PNM proposing its 2013 Renewable Energy Portfolio.
To be sure, the tax implications for the participating homeowner are a bit on the gray side, according to tax experts.
“There’s really no guidance,” said James Hamill, director of Tax Practice at Reynolds, Hix & Co. in Albuquerque, who writes a weekly column for the Journal’s Business Outlook. “The general rule is if you receive something, it is taxable unless you can find an exclusion.”
PNM is unaware of one, spokeswoman Susan Sponar said. She said the company worked with the state’s congressional delegation to see if an exclusion could be provided, but wasn’t successful.
“If we do not report these payments, we could be fined,” she said.
Customers who seek to participate in the PNM program are advised that the sale and purchase of solar RECs might create a tax liability, Sponar said. They are also told that by signing the agreement to participate, they are acknowledging they have the sole responsibility of paying any federal, state or local tax, including federal income tax.
Sponar said that in 2009, the company started to issue 1099 forms – used to report miscellaneous income payments other than wages or salaries – to customers who receive $600 or more a year in REC payments.
Hamill noted that in a recent column he replied to a question from a solar system owner about whether one could claim depreciation on the equipment. Technically, Hamill said, the answer is yes, but …
Tax deductions, he said, can be claimed on two types of income-producing activities: operating a trade or business, or for the production of income.
The problem, he said, is that the owner is not really operating a business, but “sort of a hobby” – in the eyes of the IRS – to offset the cost of the owner’s own electricity use by being able to sell power back to PNM.
“Any deduction you’d be allowed for, say depreciating the equipment, would have to be itemized deductions because that’s the way the rules work on so-called hobby losses,” Hamill said.
Deductions, though, are allowed only if they exceed 2 percent of the person’s adjusted gross income.
“And so from a practical standpoint, you might end up reporting all the payments as income and get no offsetting expenses,” he said.
