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How is the IRS term "placed in service" to be interpreted for determining whether the tax credits on a solar system can be claimed for this year? We're coming up on year end and around here it is difficult to get the POCO inspectors out to final an interconnection in order to turn it on. Some installers claim that a short system "test" qualifies the turn on. One advantage of the SMA SunnyBoys with the Secure Power Outlet, is you can truly run the system disconnected from the grid and be placed in "off-grid" service. What other tricks are there for being "placed in service"?
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BSEE, R11, NABCEP, Chevy BoltEV, >3000kW installed -
I interpret it as the normal every day meaning - ie. when it starts being used.
And I would try to avoid being in a state where it's not clear if it was placed in service in 2015 or 2016. (Today's 11/7 - so if you get the install done now, there's time for inspections to be done before 1/1)
I don't think there's any case law about an installation that's producing power in one year but not approved by the POCO until the following year. (Or not approved by POCO nor AHJ)
When dealing with tax issues, anything that is a "trick" is IMO something to avoid.What other tricks are there for being "placed in service"?
Often when someone says it's a "trick", the IRS calls it "tax fraud"
If it's not dishonest, usually people call it a loophole, or something else and not a "trick" -
Many good tax attorneys or accountants are bonded and insured, and will take the risk of the "interpretation" of the IRS rules upon themselves. I try to always use one of those. So find a good tax attorney, pay them to file your return, and allow them to interpret the IRS rules. It's their job, it indemnifies you usually (as long as what you tell them is completely honest factually), and it saves you the hassle of the paperwork. Note: I am not an attorney or tax expert.Comment
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There is no firm answer at this point in time.
The Placed in Service question has some precedent in other IRS sections relating to renewables defined as "ready and available for its specific use". And there are other IRS cases and revenue rulings that are summarized in the private letter ruling (though non-binding to anyone other than the private letter ruling was issued to) wherein there were 5 stated consideration factors to determine placed in service for a non-residential wind generation unit.
The above referenced cases and revenue rulings provide that the following are common factors to be considered in determining placed in service dates for power plants:
(1) approval of required licenses and permits;
(2) passage of control of the facility to taxpayer;
(3) completion of critical tests;
(4) commencement of daily or regular operations; and,
(5) synchronization into a power grid for generating electricity to produce income.
See generally, Rev. Rul. 76 -256, 1976 - 2 C.B. 46, and Rev. Rul. 76 -428, 1976-2 C.B. 47.
These factors are not exclusive they are used as guideposts to determine whether, looking at the totality of the facts and circumstances, a facility has been placed in service.
Please note what I stated and quoted above was compiled by the attorneys who submitted the request for IRS determination via PLR, NOT what the IRS stated are the 5 common factors. The assumption being made is the attorneys who compiled this list referencing tax case history and revenue rulings can be relied upon as the IRS did not dispute any of those statements and further yet, gave a positive ruling to the tax payer's placed in service date as their request itemized affirmative compliance with the factors.
So,
If you meet all 5 it's a slam dunk. Obviously the sticky point here is the interconnect to POCO being #5, but also possibly #4.
The main point I'd be concerned with is this line from the IRS conclusion: as long as the Project is able to deliver at least X percent of its capacity to market . It leads me to believe they are weighting item #5 heavily enough to mention it as conditional of their approval of the taxpayers placed in service date.
As others hinted, you take your chances and file your return as you and your CPA see fit and 1) if you get audited, and 2) if the auditor challenges that specific tax credit, then it's up to you (and/or CPA) to make the case for your interpretation of place in service date. Basically they challenge, you must prove it. If you lose and do not contest further, yes you 1) pay the tax anyway, 2) pay interest on tax you did not pay, and 3) are issued penalties which can often be around 10% of the tax difference owed, but depend on some other factors.
As usual, I'm not an attorney or CPA so don't come crying to me the auditor kicks over your milk bowl.Comment
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It may save you some hassle of the paperwork, but I'm not sure all CPAs will provide you the "fight the auditor on this tax challenge" for free. I do recall one of my CPAs saying they'd cover the interest and penalty charges if it was their mistake, certainly not the tax due or costs for representation. This is likely where you got the tax professionals "bonded and insured" idea above, professional error or omission insurance would cover their mistake, not if any of their clients get audited. And collecting on that is a whole different topic.
Audit assurance/coverage should be stated in your Engagement Letter or one of it's attachments. If it is not stated, it is likely not provided without charge. And even if stated to some degree, like many warranties they can have fine print along the lines of "provided you keep all supporting documentation", "immediately notify us of all communications from taxing authorities and any information that materially alters your tax filing", etc. That's just off the top of my head, so who knows what else there could be.Comment
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For a grid tied system the simplest and best proof to an IRS auditor is to show the affect on your electric billing statement from POCO. That is independent proof and will stand up to scrutiny.
Turn it on.
If POCO has not approved and bill go up or if POCO approves and bill goes down, either way you have proof of "placed in service"Comment
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