Clarifying That an Integral Analysis Is Not Required for Storage Devices to Be a Part of Solar Energy Property Under Regulation Section 1.48-9(d)(3), Through IRS Published Guidance or Expanding the Definition of Solar Energy Property Under Regulation Section 1.48-9(d)(1) to Include "Equipment And Materials . . . That Use Solar Energy Directly to Generate Electricity or That Store the Solar Energy so Generated" (IRC Section 48, Treasury Regulations Section 1.48-9(d)(1) and (3))

By Shirley Chin¹ & Wolfram Pohl^2,3

EXECUTIVE SUMMARY

Section 48(a)(3)(A)(i)⁴ defines the term "energy property" to include any property that "uses solar energy to generate electricity." Regulation Section 1.48-9(d)(1) clarifies that the term "energy property includes ‘solar energy property’ [which, in turn,] includes any equipment and materials (and those parts relating to the functioning of such equipment) that use solar energy directly to generate electricity." Regulation Section 1.48-9(d)(3) further clarifies that "storage devices, power conditioning equipment, transfer equipment, and parts related to the functioning of those items" are part of "solar energy property." Because the regulations provide that a storage device needs to be "parts related to the functioning of" (referred to herein as the "part of" requirement) the qualifying solar property in order to qualify for the ITC, tax practitioners generally view the regulations as requiring the storage system to be considered "integral" to the solar property in order to qualify for the ITC. This requirement leaves open many questions as to what specific fact patterns will cause a storage device to qualify for the ITC. Without clear guidance, tax practitioners, developers, investors, and other financing parties are hesitant to pursue storage projects where there is a risk that the storage device will not qualify for the ITC. Uncertainty over how to satisfy the "integral" requirement is hindering the financing of storage devices associated with solar energy systems.

This paper argues that "solar energy property" under Regulation Section 1.48-9(d)(1) is too narrowly defined and should be revised to include not only those equipment, materials and parts "that use solar energy directly to generate electricity" but also those equipment, materials and parts that store the solar energy so generated. Specifically, the following italicized phrase should be added to Regulation Section 1.48-9(d)(1) to read: "energy property includes ‘solar energy property’ [which, in turn,] includes any equipment and materials (and those parts relating to the functioning of such equipment) that use solar energy directly to generate electricity or that store the solar energy so generated."