Is Income from Solar Panels Taxable?

If you sell electricity or credits from your solar energy panels, you may have to report that income to the IRS.

There has not been a definitive ruling from the IRS on how exactly to treat income from solar panels on your taxes. The best course of action is to consult an accountant or tax lawyer on the details of your specific situation. Remember, if you fail to report this income correctly, the IRS could hold you responsible for back taxes, as well as penalties and interest.

That being said, there are really two distinct issues at play here: electricity and energy credits. Making money producing and selling electricity is totally separate from making money selling energy credits.

Let’s tackle the issue of electricity first. Of the two, it’s the most cut and dry. Income from electricity generated from solar panels is no different from any other income and is therefore taxable.

When asked about this issue, IRS spokesman Gregg Semanick responded, “All worldwide income is taxable unless specifically exempted by the Internal Revenue Code (IRC). In this case, it is not exempted by the IRC and is taxable income.”

Even if you are using that income to pay off the solar energy equipment, it is still taxable.

“This is no different than the products of a carpenter, farmer, factory owner, child-care provider, etc.” he said. “Another example: if a person owns a car and decides to use that car to start a courier business so he can apply his courier revenues to the car payments, his income from the courier business is still taxable.”

In fact, many people who sell electricity from their solar panels receive a 1099 from the power company. In this case, the income is unambiguously taxable and you could very well be audited by the IRS if you fail to report it. Note that not every power company will send out 1099s. Even if you do not receive one, it is still your responsibility to report the income.

Making money off of selling credits, such as SRECs (Solar Renewable Energy Credits), is a little more complicated. You’re not exactly selling a product because credits are essentially a fake commodity created by the government to encourage solar energy.

When you sell credits, the essential question is whether you make a profit. If you do not make a profit, and are just recovering your investment in the solar energy equipment, then most likely that income is not taxable. If however, you do make a profit from selling the credits, you will most likely be required to report that income to the IRS and pay tax on it.

Solar energy is still a relatively new area of tax law and the IRS’s rules and expectations are still a little fuzzy. Be sure to consult with an expert to make sure your taxes are 100% squared away.

Photo via Jeremy Levine on Flickr.