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May 23, 2013

Are the production based incentives in WA State subject to federal income tax? -Jim

SunShot Solar Outreach Partnership

The SunShot Solar Outreach Partnership has been tasked with helping accelerate adoption of photovoltaic (PV) solar at the local level by providing timely and actionable information to local governments.


First, we are not accountants and are not qualified to provide tax advice. If you would like a more definitive answer, you are encouraged to consult an accountant or other tax professional. Having given that disclaimer, we will provide some background information for you to consider based on our knowledge of these incentives, but again, we suggest you seek advice from a professional before making any investment decisions.

Second, we are aware of several production-based incentives (PBIs) in Washington State. Since you referenced “incentives” (plural), we’ll assume you are asking about all PBIs collectively, rather than one specifically.  

One over-arching principle to keep in mind is that the IRS generally considers all money entering your pocket from any source to constitute gross income for tax purposes, unless the Tax Code provides a specific exclusion. Interestingly, Section 136 of the U.S. Tax Code provides a tax exemption for energy conservation subsidies provided directly or indirectly to customers by utility companies. This raises a key question --- are the production-based incentives offered in Washington State considered “energy conservation subsidies” within the context of Section 136? Section 136 does not elaborate on what constitutes a “subsidy” and does not directly reference PBIs or renewable energy credit (REC) purchasing programs, so this is open to interpretation.

Section 136 does, however, provide a definition for an “energy conservation measure”, which we think may be important for your question. According to Section 136, an energy conservation measure is “any installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand with respect to a dwelling unit.” We will discuss this definition further below.

The IRS has a process through which a taxpayer can have a specific tax question answered through a “private letter ruling” (PLR). PLRs are binding for the specific taxpayer who requested it, but only apply to the specific instance referenced by that specific taxpayer. A separate taxpayer cannot use another taxpayer’s PLR for protection, but PLRs can provide a helpful window into the mind of the IRS. We are aware of two PLRs that can help triangulate the IRS’s opinion on your question, but there are some differences between these scenarios and your question, which leave a gap in making a positive determination.

First, PLR 200717010 fleshes out the exemption provided by Section 136. This is not very helpful for your specific question, but may be worth reading for some background information.  

More interesting, PLR 201035003 addresses a question about whether payments received from a REC-purchasing program constitute income. REC-purchasing programs are similar to the PBIs in Washington in that the incentive is paid over time, rather than as one upfront rebate. In the PLR, the IRS argues that the REC payment is not a subsidy, but rather a sale or exchange of property and property rights. Their decision does not seem to be influenced by the paid-over-time nature of PBIs versus upfront incentives, so that is the first gap in trying to correlate your question with this PLR. The supporting materials for thePBIs offered by three publicly-owned utilities in Washington do not clearly specify that the utility receives the RECs in exchange for the payments, but we’re assuming that is the case. If so, we think it would be likely that the IRS would consider these payments taxable income based on the argument presented in PLR 201035003. But if the utilities do not receive the RECs, then this PLR does not provide clear guidance. WAC 458-20-273, however, clearly states that, with the exception of utility-owned community solar projects, RECs remain with the system owner when participating in the state-designed PBI.

Another factor to consider is whether or not the power will be used onsite via net metering, or if it will all be sold to the utility. Given the definition referenced above for an “energy conservation measure” in Section 1603, we would argue that a solar system can only qualify for the exemption if the power is used onsite.

Again, we are not accountants and can make no claims about the validity of our arguments. We are providing this information to help you in the process of trying to find a definitive answer to your question.

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