As tax season approaches, we are asked about how clients should handle the income associated with SREC sales for tax purposes. SRECTrade is not in a position to provide tax advice and we always recommend that clients should consult their tax advisors when it comes to making tax related decisions, but below is some information provided by a New Jersey CPA.
IRS Publication 525 “Taxable and Nontaxable Income” under the caption “Other Income”, states the following:
“Energy conservation subsidies. You can exclude from gross income any subsidy provided, either directly or indirectly, by public utilities for the purchase or installation of an energy conservation measure for a dwelling unit.”
It goes on to define a couple of terms:
“Energy conservation measure. This includes installations or modifications that are primarily designed to reduce consumption of electricity or natural gas, or improve the management of energy demand.”
“Dwelling unit. This includes a house, apartment, condominium, mobile home, boat, or similar property. If a building or structure contains both dwelling and other units, any subsidy must be properly allocated.”
The CPA’s interpretation of this is that the income from the sale of SRECs is not taxable income to the extent that it does not exceed the net cost of purchase/installation, meaning the actual cost less any federal tax credits and state rebates. The CPA advised their client that the law, both federal and state (NJ in this case), is not definitive with respect to SRECs specifically, but the CPA is comfortable taking this stance based on the information that is available at this time.
This information is provided to help assist SREC sellers in determining the best way to handle their SREC income, but by no means is this definitive. We suggest you consult your tax advisor to determine the best way to handle the income associated with your SREC sales. Additionally, be sure your tax advisor understands the underlying mechanics of how SRECs are utilized as a market based incentive for solar system investment.