Unless and until we have access to economic bulk storage, substitution of carbon-free sources for fossil fuels will increase cost significantly. The cost must be borne by some combination of...
Tax Implications of NEM Successor Policies
Federal income tax treatment has nothing to do with pricing sale of electricity to utility or customer.
The Clean Coalition recently published a report titled "Net metering & feed-in tariffs: Understanding the tax implications of distributed generation policies." 1 Here I address some concerns related to the analysis in this report. And explain how the Internal Revenue Service, IRS, should be expected to analyze the potential tax consequences of a Net Energy Metering arrangement, NEM, and a Feed-In-Tariff, FIT.
The IRS understands that residential solar customers are delivering electricity to their utilities under several NEM and FIT transactional patterns. However, they have not issued any guidance addressing the taxability of such arrangements. At this time it is uncertain whether they will choose to issue guidance.
Proponents of NEM attempt to use the pricing distinctions between NEM and FIT arrangements to support different tax results. They argue that a FIT produces a taxable transaction and a NEM arrangement does not.
This outcome is unlikely. Both transactions result in delivery of electricity produced by a residential customer to a utility for consideration in the form of a credit for future electricity, cash, or a combination of both.
The IRS has not addressed any of these issues. If they do, it will be difficult for them to distinguish the facts of a FIT from a NEM arrangement.
Either both will give rise to some form of a taxable transaction or neither will. The only distinction is in the quantity of electricity sold to the utility, which is dependent on how the system is engineered. It is not dependent on the price at which the various transactions occur or the crediting or billing arrangements.
While the form of a transaction can have implications for federal income tax treatment, generally the substance of the transaction will control. If the IRS chooses to review the federal income tax treatment of these transactions, the substance of the transactions will be paramount in their analyses.
For federal income tax purposes, the IRS has long adhered to the position that the sale of electricity is the sale of a good (tangible personal property). The transfer of ownership of a good for consideration constitutes a sale or exchange for federal income tax purposes. It is unlikely that the IRS will analyze solar transactions under any other characterization, such as a loan or the provision of a service.
When comparing NEM to FIT, the terms must first be defined, not only by the various pricing and billing practices, but also by the flow of the electricity.
In what might be called a true FIT, the residential customer