Character of Income

Federal Tax Law

References are to Sections of the Internal Revenue Code

Payments made by host to IPP (Independent Power Producer) for the sale of electricity

• Ordinary income to IPP (IRC SEC 61)

Payments made by IPP to host for use of property

• Ordinary deduction if made as part of a trade or business of IPP (IRC SEC 162, otherwise IRC SEC 212 –itemized deduction for individual taxpayer)

Payments received by IPP from the sale of SRECs (solar renewable energy certificates)

• A sale of property held for less than 12 months
  • Short term capital gain (IRC SEC 1221)
• A sale of property held for 12 months or more
  • Long term capital gain (IRC SEC 1221)
• If sold in the ordinary course of business – ordinary income (IRC SECs 1221, 61)
  • If selling electricity (i.e. property held by the taxpayer primarily for sale to customers (i.e. to third parties such as a host or to a public utility) in the ordinary course of his trade or business)
• If the sale is to extinguish all rights the IPP has in SRECs from said array then a Section 1231 gain (long term capital gain treatment) arises if the array has been used in a trade or business for 12 months or more, otherwise ordinary income.

Self-employment (SE) Tax

• If the IPP is conducted on a continuous and substantial basis directly by the owner or via a membership or partnership interest by the member/partner then the distributive share of taxable income will be subject to self-employment tax in addition to the normal income tax. 
• If the IPP owner(s) is(are) subject to such a tax it is likely the 2013 “surtax” on unearned income will NOT apply to this type of income. 
• A loss from SE in one tax year (i.e. 100% bonus depreciation) will not be an offset to SE income in another tax year however the loss may constitute a net operating loss that may be carried back or carried forward to another tax year to offset regular or alternative minimum taxable income.
• Consideration should be given to the type of entity structure (i.e. S Corporation) used by the IPP to manage these types of income tax issues