Does net metering produce taxable income?

[rbeard0330]

I'm researching an article about the taxation of small-scale solar projects, and I'm trying to learn a little more about how people are treating net metering for tax purposes. Take a hypothetical scenario where a homeowner installs some solar panels. Over the course of the month, the system produces a total of 500 kWh of electricity. 250 kWh are used by the home as they are produced, and 250 kWh are fed back into the grid. In total, the house uses 750 kWh of electricity, so 500 kWh are drawn from the grid. The monthly utility bill shows 250 kWh usage.

Now, I am assuming that every single taxpayer in the United States reports zero gross income from this transaction. However, from a strictly technical perspective, it seems like what is really happening is that the homeowner is producing 250 kWh of electrical power for the utility during peak solar hours. The payment for this service is that the utility agrees to provide 250 kWh during nonpeak hours. Service-for-service barter transactions give rise to gross income equal to the fair market value of the service. Treas. Reg. § 1.61-2(d)(1); Rev. Rul. 83-163. This suggests that the homeowner in the example has income equal to the value of 250 kWh of electricity and has an increased utility expense in the same amount. However, since home utility bills are nondeductible personal expenditures, taxable income should go up.

In my research, I have seen some pretty confident assertions that there are no tax issues with net metering, but I have not come across any substantive back-up for that conclusion. In particular, people seem fairly confident that feed-in tariffs are a tax problem, but obviously net metering and FIT are conceptually pretty similar, so the divergence of opinion is surprising. Is there some authority out there that I'm not aware of, or are people just getting comfortable with this position (no income from net metering) based on the implausibility that it would ever be challenged? I'm also curious if people consider reporting income if there's a month where they are owed a net balance from the utility. In that case, it would be much easier for the IRS to say there is income, even if the owner expects to roll the statement credit forward to the next month.

I greatly, greatly appreciate any insights or experiences people are able to offer. I know I am a newcomer to this community, but hopefully this discussion will be interesting to everyone in addition to being useful for me!

[inetdog]

Hello rbeard, and welcome to Solar Panel Talk!

I think that the last people you want to ask about tax issues are the majority of members of this forum.

But I agree that net metering would seem to cancel out in the sense that your capital expenditure for the system has reduced your utility bills but not produced any taxable revenue unless you have a net surplus at the end of the annual adjustment cycle and your POCO actually pays you for that surplus.

FITs get more complicated, and for states that give SRECs, I think that it is likely the revenue from eventual sale of the SRECs would be taxable.


But I am neither a tax lawyer nor an accountant, so what I think does not count for anything.

[Naptown]

This thread should be shut down.
Please don't give the gubermint any ideas like how they are adding taxes to EV's as they dont pay fuel tax.
Interesting question but I suggest letting sleeping dogs lie.

[pleppik]

I'm researching an article about the taxation of small-scale solar projects, and I'm trying to learn a little more about how people are treating net metering for tax purposes. Take a hypothetical scenario where a homeowner installs some solar panels. Over the course of the month, the system produces a total of 500 kWh of electricity. 250 kWh are used by the home as they are produced, and 250 kWh are fed back into the grid. In total, the house uses 750 kWh of electricity, so 500 kWh are drawn from the grid. The monthly utility bill shows 250 kWh usage.

Now, I am assuming that every single taxpayer in the United States reports zero gross income from this transaction. However, from a strictly technical perspective, it seems like what is really happening is that the homeowner is producing 250 kWh of electrical power for the utility during peak solar hours. The payment for this service is that the utility agrees to provide 250 kWh during nonpeak hours. Service-for-service barter transactions give rise to gross income equal to the fair market value of the service. Treas. Reg. § 1.61-2(d)(1); Rev. Rul. 83-163. This suggests that the homeowner in the example has income equal to the value of 250 kWh of electricity and has an increased utility expense in the same amount. However, since home utility bills are nondeductible personal expenditures, taxable income should go up.

IANATL, but refunds and rebates are generally not taxable income.

If you are getting a refund for "returning" some of the power you bought, then there's no tax event. You're simply using less electricity, and spending less isn't taxable.

The question is: Is net metering two transactions (buying power from the utility, selling power to the utility), or one transaction (buying power based on the net instead of gross usage)? You are treating it as two transactions, but there's a strong argument to be made that it's one transaction.

As far as I know this has never been tested in court, and there have been no rules specific to this situation. That's likely to change at some point.

[Ian S]

Under APS in Arizona, you don't get to offset offpeak usage with excess onpeak usage. The two buckets are kept separate. That said, even if you were using on peak to offset off peak, you'd be providing something of high value (on peak power) in return for something of lower value (off-peak) so that would seem to be resulting in an actual loss not a gain or profit. Of course IANAL and I didn't even stay in a Holiday Inn last night!