possible tax on SMART program payments

[isokolov2009]

Hi there,

Owners of solar panels can participate in various programs to sell electricity back to the grid. For example, the SMART program in New England. If this income taxable?  Several electricity providers (for example, National Grid) send 1099-MISC forms to the participants of this program.  If it is taxable, should it be then offset against the cost of solar panels/batteries? It would make sense because this "income" is generated by the purchased means, the solar panels, and equipment. So the expenses to buy and install it should counterbalance the "income".

I would greatly appreciate clarification on this new topic.

Thank you.

--Igor

[KrisD15]

Yes

the income is taxable

You can enter it as "other income'

It could be considered "Hobby Income" since you are not really in the business of generating and/or supplying electric power. 

If you did choose to report it as "business income" (forgoing any regulation issues) you would need to list the panels as assets. Since you also use the panels for personal use, you would need to know the percentage of personal use versus business use and prorate the costs accordingly. 

All the assets would also be depreciated. 

When you sell your home, you would need to allocate part of the sale proceeds to those business assets since they are connected. Depreciation on the assets may need to be recaptured. It doesn't matter if you really do claim the depreciation, the recapture is based on what you should have taken even if you didn't. That would be taxed as ordinary income. 

Depending on the amount, it might not be worth the effort.

[cestyrose]

If am only receiving credits on my electric bill because I am producing more energy than I am using, do I have to pay taxes on that?  Also, does participation in a program such as this affect my ability to use the solar credit for my install?

[isokolov2009]

Thank you, KrisD15.  One question with respect to your answer. If you sell your house, why not to consider solar panels and batteries as a part of the structure? It makes sense because it is sold together with the house and increases the value of the house. That way it will be possible to claim the profit from the house sale as capital gain. Does make sense?

[isokolov2009]

Yes, it is taxable. If you elect to avoid paying full taxes on this income, it might be cleaner to declare a separate "business" to sell electricity with your passive participation. You should then be able to claim solar panels and batteries as a partial asset of that business. (Partial because it is also used for your personal matters). Since the utility companies send you the details of how much electricity was sold versus how much was used for your house, it is quite simple to calculate the percentage of the business use.
Please note that calculation of depreciation is a little bit tricky because it allows you to choose multiple options. Besides that, according to IRS, the value of the asset should be decreased by 50% of the amount you received as the tax incentives credit. For example, if your spent $30K is the total cost for the panels and installation etc., and received $8K of the tax credit, the value of the asset used to calculate depreciation should be $30K-0.5*$8K.
Disclaimer: by no means consider this as legal advice. I am not an accountant, I am just a person who fed up with multiple contradictive explanations by different accountants, and decided to read IRS documents by myself. And this is what I plan to use. However, because I am not a professional accountant, there is a chance I'm missing something.