Do I have to pay self employment tax on income for excess solar power we produce for our residence and get paid for by the power company?

[quincytoes]

The IRS sent me a letter wanting me to pay self employment tax on the income we receive from the excess power we produce at our residence and Intuit seems to say that I do not pay self employment tax on that income.  Since 2013 I have put that income on "other income" line and have not paid self employment tax as I didn't consider it a business!

[Carl]

On what form is that income reported to you by the power company? In what box on that form is the income reported? This matters big time.
The IRS letter was most likely auto-generated by a computer based on how you reported the income. So we need to start at the beginning with how the power company reported the income to you.

[quincytoes]

I did not receive a 1099 or any form from the power company.  We get 2 checks a year from them and I just reported the amount from my check stubs as other income.

[Carl]

Where *exactly* are you reporting the income in the program? There are numerous places to report other income, because there are many types of income that could be classified as "other" without being business income. Also, what line on your 1040 is this other income reported on? I suspect line 21. If it is on line 21, then what is the "description" for that income on line 21?

[Carl]

There are several lines of thought on this, and here's mine.
If the amount you receive from the power company each year is less than what you pay the power company each year, then I would consider it a refund for the electricity I "gave back" and did not use. In such a case, I wouldn't report squat if the power company didn't send me a 1099-MISC or some other tax reporting document stating what they paid me.

[quincytoes]

It is reported on line 21 of Form 1040 and states Income from Solar Power on that line.  The power company deducts the amount we owe from the amount we produce and we end up with around $1500 to $1600 in payments from the power company. So we do produce more than we use.

[quincytoes]

Just wanted to clarify after reading my above comment that it is around $1500 to $1600 PER YEAR that we get.  Didn't think that was very much to be considered a business. 🙂

[rjs]

The amount of income is not what determines whether it's a business.

[quincytoes]

Okay, thanks so much for your help!

[Carl]

Since you sell back more than you use, it's a business as far as the IRS is concerned. You'll report the income/expenses on SCH C. What I would suggest you do is treat it "exactly" like a business. That business has assets - namely the solar power panels, coverters, and any other equipment associated with the production of power. You paid for those panels. So the lesser of what you paid for them, or their FMV at the time they were placed "in service" in the business is the value of the business asset you'll use when listing your cost for the asset in the Business assets section. My guess is, what you paid for them is the value you will use here. Note that you include the "total" cost - not just what you paid for the panels themselves. It also includes the cost of installation, shipping, etc. The value will be depreciated over 40 years, and that depreciation is deductible from your taxable business gain each year. Any repairs or routine maintenance you pay to have done to the solar electrical system are a deductible business expenses too.

[rjs · Accepted solution]

It sure sounds like you are in the business of generating electricity and selling it to the power company. It's the same as if you owned a large generating plant, just on a smaller scale. So it has to be reported as business income, not other income, and that means you have to pay self-employment tax. At least that seems to be the position that the IRS is taking, and it does seem reasonable.

However, this seems to be an unsettled area of tax law, so the rules might not really be clear. I suggest that you consult a local tax attorney (not just a tax return preparer) who can research the current status of the law and recommend an approach for you to take in dealing with the IRS. There may be something you should do to protect your interest if the issue is settled in your favor in the future. You might also have expenses that you can deduct against the business income, which would reduce both the income tax and the self-employment tax. We haven't discussed that possibility here. Ask the attorney about all these issues.

[TomD8]

This previous answer from a TT enrolled agent indicates that this type of income is not subject to SE tax:  https://ttlc.intuit.com/questions/3818542-income-from-solar-panels-rec