Depreciation/business expense of solar panels on primary residence

[Kurajo]

I have seen numerous discussions regarding the use of solar panels that generate excess power which is returned to the grid.  The questions being asked is if this qualifies as a business and if so can the solar equipment be depreciated.  In some of the posts multiple "experts" offer differing opinions.

So, here it is again.  I have a $50,000 solar panel system installed on my residence.  The system is constructed with the intent of not only powering the home but also generating excess power above and beyond what the residence requires.  This excess power is measured via net metering and returned to the grid.  The home owner is compensated by the utility provider for the excess power generated which they then use to power other people's homes/businesses.  The compensation is in the form of bill credits.  1 kWh credit for every excess kWh.  This is paid by the utility provider.  As of now, there are no cash payments to the owner, only bill credits.  The credits can be used to offset any future electric charges incurred (i.e. during a month of cloudy weather for instance).

Does this qualify as a business and if so can the solar panels be depreciated?

If the owner is also an independent contractor (real estate agent for example) who operates their business within the same residence, does this change things?

[NCperson]

@Kurajo - not trying to asnwer the question, just trying to ask questions...

does this qualifiy as a business? what is the profit motive if there are no cash credits?

did you take the solar tax credits? (if yes, sounds like a 'double dip': tax credits and depreciation)

IRS definition of a business: 

https://www.irs.gov/businesses/small-businesses-self-employed/business-activities#:~:text=A%20trade%....

Trade or Business

A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether an activity is a trade or business. Some of the important facts and circumstances used to make this determination include:

1. regularity of the activities,
2. regularity of the transactions,
3. production of income, and
4. ongoing efforts to further the interests of your business.

You do not need to make a profit to be operating a trade or business but you do need to have a profit motive. The above list is not all inclusive in the determination of whether an activity is trade or business. For more information about making this determination, see Five Things to Remember about Hobby Income and Earning side income: is it a hobby or a business? 

[TomD8]

I agree with @NCperson.    I too don't think you have a "business" as the IRS defines it.  Credit rebates against your utility bill are not usually considered taxable income.  Instead, they're considered discounts.

I think the situation would be different if the utility paid you cash, instead of giving you rebates on your bill. 

Does the utility company issue you a 1099 at year's end? 

[Kurajo]

@NCperson Well when this first started cash payments were how the customer was compensated.  However, this has turned to bill credits recently.  The intent however of configuring the system to overproduce is with the sole intention of making a profit on the investment

[Kurajo]

@TomD8 At this time I do not believe the utility company provides a 1099.  Im guessing this is one of the reasons they use credits now instead of monetary payback. 

Full disclosure, this is the process one of the solar companies said is a viable method of furthering a return on investment.  However, I have yet to confirm officially if this is accurate.

[TomD8]

@Kurajo 

So it appears that you don't have a basis for declaring yourself a business nor for depreciating your panels as a business asset.

On the positive side, those rebates you're receiving are not considered taxable income.  They're considered a discount off your utility bill.  

[Where do I add Solar compensatio]

This operating investment credit deduction article thread applies to what we have. Purchased Solar equip in 2023, Taking the MACRS depreciation tax incentive (4562) (5695) over 5 years. In our second year, no expenses such as interest or maintenance or related costs. Utility uses net-metering as credits against future usage. Compensation received from kWh distributed back into the grid as net kWh at .07 per kWh. I see the Form 4562 and 5695 and worksheets in 2024 TurboTax so that is being applied for 2024 tax year.

What we understand is there is no monetary compensation received for the annual production back into the grid. Is this a discount and not reportable income or expense? No SRECs. My understanding is this compensation is the main qualification for taking the MACRs depreciation deduction. If you are reporting the depreciation, you must report the associated income. This boils down to where do we report the kWh compensation for solar energy credits and deductions. Or is there nothing to do for years 2 through 5.

When we purchased the solar equipment we were provided the 5695 and 4562 tax computation forms as part of the product package for the 2023 install and tax year at our primary residence and business/hobby location. This was applied to 2023 tax year. There is no carry over on 5695.

Summing it up, where do we report kWh compensation received or do we do nothing since it is net-metering.

[MarilynG1]

If you are claiming electric costs as a Business/Rental expense (depreciation),  you should probably report your net metering credit as associated Business Income.

Here's some info on Tax Treatment for Solar Panels. 

@Where do I add Solar compensatio 

[AmeliesUncle]

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@Where do I add Solar compensatio wrote:

Taking the MACRS depreciation tax incentive (4562) (5695) over 5 years.

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If you are claiming it as a business, you will continue to report your self-employed business for as long as you own the solar panels to report the income.

Were you depreciating 100% of the panels (minus the Basis reduction for receiving the tax credit)?  If so, (1) you need to report the FULL amount of electric production that the panels produce, not merely the "net" amount after you use it for your personal home, and (2) Form 5695 was the wrong form; you should have use Form 3468.