Qualified Solar Expenses

[KoaAndrew]

I am removing my 20 year old solar panels replacing them with new ones, re-insulating my attic, and replacing my A/C main condenser.

My solar company is requiring us to repair a section of my roof before the installation can proceed. I know that I can submit for a solar credit on the new installation. 

How should/can I address the costs of the 1) Roof-pair, 2) Removal of the old solar panel + system, 3) attic re-insulation, and 4) main condenser replacement?   

[Opus 17]

The only part of the system that is eligible for the solar electric credit is parts related to the generation of electricity, not how it is used (the A/C condenser).  The cost of the roof repair and insulation is also not eligible.  The cost to remove the old system would be part of installing the new system, so it would be eligible.

You probably want to get an invoice with a cost breakdown so you can prove to the IRS, if audited, which parts of the cost are eligible for the credit.  

The A/C condenser may be eligible for the 10% energy efficiency credit, as well as the insulation.   You can claim 10% of the cost of the insulation (product only, no installation costs allowed) and 10% of the cost of the A/C condenser (installation costs are allowed).    There is a $300 credit limit for the A/C and a $500 overall lifetime limit of $500, so if you used the credit before (such as for doors and windows) your credit now may be limited or not available. 

You will want to review form 5695 and its instructions to see the other requirements (such as the minimum energy rating the AC must have to qualify).

https://www.irs.gov/forms-pubs/about-form-5695

The cost to repair the roof is a building improvement, and increases your cost basis, which may reduce your capital gains when you sell.  The cost of the condenser, solar panels and insulation are also building improvements that increase your cost basis, but you can only claim the net cost as a building adjustment, after taking into account all your state and federal tax credits and any local rebates. 

[AmeliesUncle]

The roof repair would be included in the solar credit because it is a required part of the installation.

For future readers, work on the roof (such as re-shingling) is NOT part of the solar credit if it is merely just a convenient time to do it.  If it is not part of the installation, it would not be included.

[Critter-3]

I would agree to the roof repairs but only to  the extra costs incurred if the roof needs to be “beefed up” to handle the extra weight but not if it just puts the roof back in ordinary working order. 

[Opus 17]

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@AmeliesUncle wrote:

The roof repair would be included in the solar credit because it is a required part of the installation.

For future readers, work on the roof (such as re-shingling) is NOT part of the solar credit if it is merely just a convenient time to do it.  If it is not part of the installation, it would not be included.

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I don't believe that is correct.  You have to read the entire instruction on form 5695.

No costs relating to a solar panel or other property installed as a roof (or portion thereof) will fail to qualify solely because the property constitutes a structural component of the structure on which it is installed. Some solar roofing tiles and solar roofing shingles serve the function of both traditional roofing and solar electric collectors, and thus serve functions of both solar electric generation and structural support. These solar roofing tiles and solar roofing shingles can qualify for the credit. This is in contrast to structural components such as a roof's decking or rafters that serve only a roofing or structural function and thus do not qualify for the credit. 

What this is saying is that, if you install something that is both structural and part of the solar system, it is not disregarded for the credit, even though it is also structural.  However, the roof structure itself is not qualifying.

If you compare the instructions to form 5695 from prior years (for example, 2014, https://www.irs.gov/pub/irs-prior/i5695--2014.pdf), you will see that the language in the instruction has changed.    Half the paragraph is missing in 2014.  This clarifying language was first added in 2018:

Some solar roofing tiles and solar roofing shingles serve the function of both traditional roofing and solar electric collectors, and thus serve functions of both solar electric generation and structural support. These solar roofing tiles and solar roofing shingles can qualify for the credit. This is in contrast to structural components such as a roof's decking or rafters that serve only a roofing or structural function and thus do not qualify for the credit. 

I think this clarifies that roof repairs do not count as qualified solar electric costs.  

Many of us, including possibly me, gave different advice in the past.  But I think this is a pretty clear statement of the IRS views on the law on this topic. 

[Opus 17]

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@Critter-3 wrote:

I would agree to the roof repairs but only to  the extra costs incurred if the roof needs to be “beefed up” to handle the extra weight but not if it just puts the roof back in ordinary working order. 

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I disagree based on the changes to the instructions to form 5695 starting in 2018, see my other comment.  

This is also in agreement with section 25D, which says in relevant part "No expenditure related to a solar panel" will fail to qualify for the credit if it is also structural.  The roof deck is not a solar panel. 

[AmeliesUncle]

That is very interesting.  I missed that change in the Instructions, so thank you for pointing that out.  I'll need to research where that thought actually came from (court case, IRS ruling, etc.).

[Opus 17]

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@AmeliesUncle wrote:

That is very interesting.  I missed that change in the Instructions, so thank you for pointing that out.  I'll need to research where that thought actually came from (court case, IRS ruling, etc.).

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I would be interested if that kind of internal deliberation had records that were accessible to outsiders.  I did try to find the section in the CFR that corresponded to section 25D of the IRC but couldn't find it.  To me, it seems like the clarification is in line with legislative intent.  

[KoaAndrew]

Opus 17 et al,

Very much appreciate you and everyone's comments to my Solar Expenses question (ref: Instructions for Form 5695).

I concur with your conclusion that structural roofing costs portion does not qualify given that the roof is indeed a "structural component of the structure." This language clearly establishes a boundary on qualified structural roofing costs versus the actual solar equipment. This is especially relevant when using solar roofing tiles/shingles that serve both purposes "electrical generation and structural support" as this section of the instruction proceeds to further describe. 

What caught my attention is the language in the prior para ...... "Include any labor costs properly allocable to the onsite preparation, assembly, or original installation of the residential energy efficient property and for piping or wiring to interconnect such property to the home."     

This language is quite specific on allowing labor costs for purposes of "onsite preparation." From my perspective, this would seem to qualify labor costs of both (1) removing the old solar panels and (2) labor in applying the torch down roof only in the section required by the solar company. 

Appreciate any thoughts. Thank you again. 

[Opus 17]

@KoaAndrew 

I would agree that there are cost to remove an old solar panel system who would be part of the installation costs of a new solar panel system and would be eligible for the credit. I am less convinced about other charges for roof preparation.  I suspect an argument could be made that if you simply removed the old solar system and got rid of it, the roof would require repair, as all roofs require repair and maintenance from time to time.  I believe the clause about installation costs refers more to electrical wiring and mounting brackets and other improvements that are required as part of the electrical system but which do not directly generate electricity.  (Although IRC section 48 is about business credits for alternative energy properties, it has some useful definitions and examples that an auditor might reasonably apply to residential installations.)

In short, I don’t think any roof repairs or improvements count toward the solar energy credit.  You may want to seek a professional opinion.