State tax filing

The IRS instructions written for any form are NOT authoritative. Only the Tax Code itself, IRS notices, and Tax Court rulings can be used in an audit to defend a tax position (the instructions MIGHT be used to request an abatement on penalties and interest, but that is not what this thread is about). I say this to show that quoting the instructions is like quoting random content from the Internet - in an IRS audit, it won't count, even if the instructions were published by the IRS itself. Most taxpayers are not aware of this; this is why CA Solar Expert quoted the actual Tax Code.

I agree that the Tax Code wording is convoluted; unfortunately, while trying to say what they want to say, the authors of the Tax Code verbally contort themselves into pretzels in order to avoid rewriting large sections of other code. This is why it is normal for the IRS to issue one or more Notices to clarify what the new Tax Code on this or that item actually means. This also means that just reading the Tax Code is not sufficient; you have to read the applicable Notices as well, which is in practice quite difficult for the nontax professional (and for a lot of so-called "tax professionals" as well).

The Tax Code in question can be found at "26 U.S. Code § 25D. Residential energy efficient property" (https://www.law.cornell.edu/uscode/text/26/25D).

Subsection (d)(2) in the Section above states “The term “qualified solar electric property expenditure” means an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer.” Note this definition well – the property being referred to uses solar energy to generate electricity.

But the issue here is about the roof under the solar panels. What about subsection (e)(2) in the same code?

“(2) Solar panels

No expenditure relating to a solar panel or other property installed as a roof (or portion thereof) shall fail to be treated as property described in paragraph (1) or (2) of subsection (d) solely because it constitutes a structural component of the structure on which it is installed.”

Doesn’t that mean that the roof is part of the property eligible for the credit?

Such an interpretation misunderstands what the Tax Code states. (e)(2) states “property described in paragraph (1) or (2) of subsection (d)” And what does paragraph (2) of subsections (d) refer to? It refers to “property which uses solar energy to generate electricity”. That is, any property that is eligible for the credit under the status of solar energy property must in some direct way contribute to the production of solar energy to the generation of electricity.

Now we understand what the curious language of (e)(2) is trying to say – no expenditure which directly relates to generating electricity from solar energy will be disqualified just because that property is part of the structure of the house. But what on earth is the code talking about? The Tax Code is referring to property that generates electricity that is ALSO part of the house, e.g., shingles that are mini solar panels and shingles that are reflective of solar light to help generate electricity by focusing the sun’s rays to increase the efficiency of the solar panels or run a steam turbine to generate electricity or the like.

The reason that the Code has to specify this curious double negative in (e)(2) is because sometimes structural components of a house do generate electricity from solar energy. The purpose of the phrasing in (e)(2) is not to include other parts of the house that don’t generate electricity.

But normal composition or concrete or terra cotta or metal shingles don’t create electricity from solar energy. The solar electric system doesn’t care what kind of shingles they are, because none of them contribute to the production of electricity. Thus they are not considered “property which uses solar energy to generate electricity” and thus are not qualified for the credit. Note that this is true even if the roof is old and common sense would tell you to replace the roof first so that the solar panels don’t have to be removed in a few years in order to replace the shingles.

The only possible argument that can be made about including the roof expenses as part of the solar electric property would be if you had to reinforce the roof in order to support the shingles. But even in that case, the reinforcement would be part of the expenses, not the shingles that may or may not need to be replaced.

Lacking any specific Notice or court case, this still remains my interpretation as a tax professional of the law. However, there is another source of relevant input: private letter rulings. I am aware that a private letter ruling cannot be quoted as precedent and applies only to the specifics of the taxpayer’s query; however, they can give insight into the IRS’s thinking on tax issues such as this.

Private letter ruling [201130003] (http://www.legalbitstream.com/scripts/isyswebext.dll?op=get&uri=/isysquery/irl2fef/1/doc) shows a discussion on whether all the components of a solar-powered air-conditioning system could be included in the solar electric property for the purposes of the credit. The letter shows that even though the “Condensing Unit” is part of the system, it is not considered solar electric property for purposes of the credit, for the simple reason that it doesn’t generate electricity. Neither do the shingles and other roof components, unless they happen to be electricity-generating shingles.

I suggest that before you accept the conclusion of random voices on the Internet (and of random tax professionals) that you find one who can support the conclusion that roofing shingles are intended to be part of solar energy property for purposes of the credit with the same level of detail as I have provided.