Solar power is gaining momentum for widespread use in the United States, assisted in part by income tax credits at the federal level. This article discusses the availability of such credits for solar systems in which the solar materials are integrated directly into commercial or residential roofing material (commonly known as “building integrated photovoltaics” or BIPV).
The Internal Revenue Code provides an income tax credit for residential and commercial solar property. Not all costs incident to a solar system qualify for the credit, however, and the line between qualifying and non-qualifying costs has changed over time as the technology has evolved. A brief review of the credit rules and the history of solar technology illustrates that the credit should be available for the full cost of manufactured BIPV systems, including installation costs, even though these systems may also function as part of a roof. For these purposes, the costs should include the costs of the manufactured laminate, and any additional materials that are necessary for the proper installation of the laminate but are not otherwise necessary for a non-solar roof. The costs of additional materials that are necessary for a non-solar roof may be eligible for the credit depending on the particular facts.
Congress adopted the first U.S. solar tax incentives in 1978 to stimulate commercialization of solar technology during the late 1970s “Energy Crisis.” At that time, solar energy systems were principally “passive,” consisting of small glass enclosures attached to a building to collect and retain heat. Even active systems were limited to heating air or water rather than providing electricity. In the late 1970s and early 1980s, the Code and regulations limited the availability of the credit to property used solely to collect solar energy. Further, any portion of a solar system that had a “dual use” did not qualify (i.e., elements that functioned as a roof or wall, or pipes that carried water heated both by qualifying and non-qualifying energy sources).
In the 1980s, photovoltaic panels that transformed solar rays into electricity shifted the focus away from passive solar systems. These photovoltaic panels contained solar cells in an encapsulant and attached to a substrate. The components were then encased in a frame with a glass cover to allow sunlight to penetrate. Several of these panels were then attached to rooftops with mounting systems that raised the panels above the roof for better ventilation. The mounting systems frequently required structural modifications to the roof to handle the increased weight and wind loads. These systems (commonly known as “building applied photovoltaics” or “BAPV”) continue to be widely used today.
During this same period, the credit rules also evolved. In 1980, Congress amended the residential credit to allow solar panels that replaced sections of a roof to qualify for the credit. In 1987, the IRS amended the regulations for commercial solar property regarding dual use, and created an allocation system for dual use pipes, ducts and other equipment. Under this system, taxpayers could claim a percentage of the credit based on use. For both the residential and commercial credit, therefore, the fact that some portion of the solar property also functioned as a “structural component” of a building did not preclude the application of the credit.
In the 1990s, BIPV solutions began to emerge, representing a further evolution of rooftop solar systems. Unlike BAPV systems, BIPV systems use lightweight, flexible solar solutions integrated directly into roofing materials, like membranes or roof tiles, installed as part of the roofing installation process. The integrated solar product and roofing material together form a “multifunctional solar product,” which reduces the overall costs of a solar energy system by displacing certain costs associated with traditional roofing materials. BIPV systems also preserve the most important function of the roof - protection of the interior of the building from exterior weather. Given their potential, the Department of Energy currently funds BIPV system research.
BIPV systems in their entirety, including the manufactured laminate and any other materials that are necessary for the proper installation of the laminate and are not otherwise necessary for a non-solar roof, should constitute solar property, and the cost of such systems should be eligible for the credit under current rules. The credit applies to expenditures for “energy property,” which, among other things, includes “equipment which uses solar energy to generate electricity.” Obviously, BIPV systems generate electricity from solar energy.
While it is true that certain elements of such BIPV systems have been carefully chosen and designed to perform a dual function - for example, on certain applications the membrane acts to protect both the building and the photovoltaic cells from the weather - the fact that these systems have been engineered in this manner does not change their essential character as solar equipment. No one purchases a BIPV system to function solely as a roof. And each element of the manufactured BIPV system is necessary to its function as solar property. If any element of the manufactured BIPV system were to be removed, it would have to be replaced with another element to enable the solar panels to function effectively as a solar system.
A comparison to BAPV systems further illustrates that BIPV systems, in their entirety, should qualify as equipment for purposes of the credit. BIPV systems are made up of solar cells encased in an encapsulant and attached to a substrate, similar to BAPV systems. The encased solar cells are then incorporated in a membrane or other material (e.g., a roofing tile) and mounted on the roof using adhesives and other necessary materials. In effect, the membrane has replaced the frame in BAPV systems in that it acts to support and hold in place the encased solar cells and the underlying electricity generating equipment. Further, the adhesive and other necessary materials replace the rack and ballast system, and any other necessary structural modifications to the roof, associated with mounting traditional BAPV systems. Thus, each element of a BIPV system is equivalent to a similar element in a BAPV system, even if the elements in a BIPV system have been designed to perform other functions. Because a BAPV system in full qualifies for the credit - indeed, Congress modified the credit for residential property to make it clear that a BAPV system would so qualify - a BIPV system should also qualify.
Additionally, no allocation of expenditures should be required under the “dual use” rules provided for pipes and ducts. The situation the allocation scheme was introduced to handle bears no resemblance to the situation presented with BIPV systems. The difference comes down to a distinction between use and function. A pipe can be used to carry energy from multiple sources, and it is possible to distinguish between the sources (i.e., 25 percent of the time the pipe is used to carry water from a gas-powered heater and 75 percent of the time it is used to carry water from a solar-powered heater). An allocation of cost can be based on such use. In contrast, each element of a BIPV system functions as a necessary part of that system 100 percent of the time even if certain elements also function as a necessary part of a roof 100 percent of the time. It is simply not the case that such elements are “used” as solar equipment for part of the time and as a roof for the remainder, and thus, no allocation for dual use should be appropriate.
The current credits for business and residential-use solar panels should be available for the full costs of manufactured BIPV systems, even though these systems may also function as part of the roof. Thus, the cost of implementing such solar energy systems for consumers may be lowered by as much as 30 percent, and because the products are truly multifunctional, consumers can save additional roofing expenses. Such savings fulfill the purpose for the credit and further encourage technologies which the government is spending millions to develop.
Authors’ note: Under IRS standards of professional practice, certain tax advice must meet requirements as to form and substance. To assure compliance with these standards, we disclose to you that this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties. This article was not written, and should not be used, as legal advice. Purchasers of solar electric systems, including BIPV systems, should consult with their own tax advisor concerning the application of any tax incentives.