Reflective roof's incremental cost qualifies as solar energy property

Plain-English summary

A manufacturer planned to install bifacial solar panels that generated electricity from light striking both sides of each panel. It would replace only the roof area beneath the panels with a highly reflective membrane and supporting materials that increased reflected sunlight reaching the panels' undersides. The IRS found that this reflective roof directly enabled significant solar-electric generation and was part of the equipment and materials using solar energy. It therefore qualified as energy property under § 48 when installed with the system. Qualification was limited to the amount by which the reflective roof cost more than a locally permitted nonreflective replacement roof, and the IRS did not decide whether the taxpayer otherwise qualified for the investment credit.

Ruling snapshot

• Question: Did the reflective roof installed beneath bifacial solar panels qualify as energy property?
• Outcome: Approved for the incremental cost above an ordinary nonreflective roof
• Key authorities: IRC § 48(a)(3)(A)(i); Treas. Reg. §§ 1.48-9(d) and 1.48-9(k)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201450013 [Third Party Communication:
Release Date: 12/12/2014 Date of Communication: Month DD, YYYY]
Index Number: 48.00-00
Person To Contact:
------------------- ----------------------, ID No. -----------
----------------------------------- Telephone Number:
---------------------- --------------------
--------------------------------- Refer Reply To:
CC:PSI:B06
PLR-112715-14
Date:
September 02, 2014

Legend

Taxpayer = -----------------------------------
Developer = ----------------------------------------
State = -----------------
A = ------
B = ---

Dear ------------:

  This letter is in response to your ruling request, submitted by your authorized

representative, concerning the application of section 48 of the Internal Revenue Code
(Code) to the facts described below.

FACTS

   The facts are represented by Taxpayer to be as follows: Taxpayer is a privately-

held limited liability company headquartered in State. Taxpayer uses a calendar taxable
year accounting period and the accrual method of accounting for maintaining its
accounting books and records and filing its federal income tax return. In order to control
its electricity costs, Taxpayer is considering the purchase of an A kilowatt (kW) solar
photovoltaic generation system manufactured by Developer. The system consists of B
panels of photovoltaic cells, electrical wiring, associated inverters and control
equipment, and mounting hardware to allow the panels to be positioned above the
surface of the roof of Taxpayer’s building in State (the System).

    The System relies upon highly efficient silicon cells that convert to energy the

light that strikes both the front and the back of the bifacial panels. As a result of the
System’s bifacial panels, the System is able to generate electrical energy using not only
PLR-112715-14 2

sunlight that directly strikes the panels, but also sunlight that is reflected from the
surface on which the panels are installed and other scattered light from ground and
ambient sources. Developer’s solar panels are roughly equally efficient on the front and
back side, meaning that up to 50 percent of the energy produced by the photovoltaic
generation system is attributable to light that is absorbed by the back side of each solar
panel. Moreover, Developer’s solar panels can produce approximately 40 percent more
energy than traditional monofacial panels when installed in an optimal configuration
over a highly-reflective surface. Unlike any other solar module currently on the market,
Developer warrants that the power generated from the back side of each module
will equal at least 90 percent of the power generated from the front side.

    Currently, the most effective reflective surfaces available for rooftop installations

of the Developer’s photovoltaic generation systems are special-purpose impermeable
membranes that are affixed to the roof of a building. These reflective membranes are
manufactured by a number of suppliers, but not by Developer. The reflectivity of these
special-purpose membranes is generally established through certifications by industry-
rating institutions, such as the Cool Roof Rating Council (CRRC) or the ENERGY STAR
rating program administered by the Department of Energy and the Environmental
Protection Agency. CRRC, in particular, publishes radiative data on roof surfaces. The
reflectivity of a surface to sunlight is measured as the “albedo” of the surface, with a
perfectly reflective surface having an albedo of 100 percent and a perfectly non-
reflective surface having an albedo of 0 percent. Developer recommends that its panels
be installed over CRRC- or ENERGY STAR-compliant (i.e., high-albedo) roof
membranes in order to capture energy efficiencies provided by the bifacial design of its
panels.

    Thus, in connection with the installation of the System, Taxpayer anticipates

installing a highly reflective impermeable membrane of thermoplastic polyolefin (TPO), a
.050 Kynar standard color coping and counter flashing, insulation adhesive, a fiberglass
mat gypsum board, the fasteners and agents used to affix the membrane, and two
layers of polyisocyanurate supporting material (together, the Reflective Roof). The
newly-installed Reflective Roof is estimated to have a reflectivity factor, or albedo, of
between 70 percent and 91 percent. The components of the Reflective Roof other than
the TPO membrane improve the long-term reflectivity of the Reflective Roof Surface by
preventing the TPO membrane from being wrinkled, torn, or otherwise damaged and
limiting the accumulation of water, dirt, and organic matter on the roof. Taxpayer has
received estimates from Developer indicating that, if the Reflective Roof is installed, a
significant amount of electrical energy will be generated using sunlight reflected from
the roof of Taxpayer’s manufacturing facilities.

   Taxpayer anticipates the System covering approximately 96 percent of the

available space on the portion of the roof that will be replaced, taking into account local
building code restrictions and the existing features of the roof. The entire roof will not be
replaced with the Reflective Roof; rather, Taxpayer anticipates installing the Reflective
PLR-112715-14 3

Roof only beneath the System. Thus, the Reflective Roof does not include the existing
roof surface that will not be replaced, the roof deck, any structural support for the roof
deck, or any features of the roof not directly related to improving and maintaining the
reflectivity of the membrane.

RULING REQUESTED

    The Reflective Roof, when installed in connection with the System, constitutes

energy property under section 48 of the Code to the extent that the cost of the
Reflective Roof Surface exceeds the cost of reroofing Taxpayer’s building with a non-
reflective roof that is allowed by local law.

LAW AND ANALYSIS

  Section 48(a)(3)(A)(i) of the Code provides that energy property includes any

equipment which uses solar energy to generate electricity, to heat or cool (or provide
hot water for use in) a structure, or to provide solar process heat, excepting property
used to generate energy for the purposes of heating a swimming pool.

   Treas. Reg. § 1.48-9(a)(2) provides that in order to qualify as “energy property”

under section 48 of the Code, property must be depreciable property with an estimated
useful life when placed in service of at least three years and constructed after certain
dates.

  Treas. Reg. § 1.48-9(d)(1) provides as follows:

         (d) Solar energy property—(1) In general. Energy property
         includes solar energy property. The term ‘solar energy property’
         includes equipment and materials (and parts related to the
         functioning of such equipment) that use solar energy directly to (i)
         generate electricity, (ii) heat or cool a building or structure, or (iii)
         provide hot water for use within a building or structure. Generally,
         those functions are accomplished through the use of equipment
         such as collectors (to absorb sunlight and create hot liquids or air),
         storage tanks (to store hot liquids), rockbeds (to store hot air),
         thermostats (to activate pumps or fans which circulate the hot
         liquids or air), and heat exchangers (to utilize hot liquids or air to
         create hot air or water). Property that uses, as an energy source,
         fuel or energy derived indirectly from solar energy, such as ocean
         thermal energy, fossil fuel, or wood, is not considered solar energy
         property.

  Treas. Reg. § 1.48-9(d)(2) specifically excludes “passive solar systems” from

PLR-112715-14 4

qualification as energy property. A passive solar system is defined as a “system [that] is
based on the use of conductive, convective, or radiant energy transfer.”

   Treas. Reg. § 1.48-9(d)(3) provides, in part, that solar energy property includes

equipment that uses solar energy to generate electricity, and includes storage devices,
power conditioning equipment, transfer equipment, and parts related to the functioning
of those items. Such property, however, does not include any equipment that transmits
or uses the electricity generated.

   Treas. Reg. § 1.48-9(k) provides, in part, that the term “incremental cost” means

the excess of the total cost of equipment over the amount that would have been
expended for the equipment if the equipment were not used for qualifying purposes.
Only the incremental cost of the types of property described in Treas. Reg. § 1.48-
9(c)(6)(i) (alternative energy property that constitutes modification equipment), Treas.
Reg. § 1.48-9(c)(8) (pollution control property),Treas. Reg. § 1.48-9(f) (specially defined
energy property), and Treas. Reg. § 1.48-9(g)(7)(recycling property that replaces and
increases existing recycling capacity) constitutes energy property.

    The System generates electricity from sunlight. Because of the bifacial design of

the photovoltaic cells, half of the aggregate generating surface of the panels is oriented
toward the underside of each panel. The design of the panels allows sunlight to shine
through the clear spaces of the module and reflect back upon the underside of the
panels from the surface on which the panels are installed. Thus, the panels generate
electricity using sunlight reflected from the surface on which the panels rest.

    When installed upon a highly reflective surface such as the Reflective Roof, the

System generates significant amounts of electricity from reflected sunlight. Because the
Reflective Roof enables the generation of significant amounts of electricity from
reflected sunlight, the Reflective Roof constitutes equipment that uses solar energy to
generate electricity when installed in connection with the System. The Reflective Roof
also satisfies, when installed in connection with the System, the definition of energy
property under Treas. Reg. §§ 1.48-9(d)(1) and 1.48-9(d)(3) because the Reflective
Roof is part of the equipment and materials that use solar energy to directly generate
electricity.

   Accordingly, we conclude that the Reflective Roof, when installed in connection

with the System, constitutes energy property under section 48 of the Code only to the
extent that the cost of the Reflective Roof exceeds the cost of reroofing Taxpayer’s
building with a non-reflective roof that is allowed by local law.

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. Specifically, no opinion is expressed whether Taxpayer
PLR-112715-14 5

qualifies for the investment credit under section 46 of the Code or whether the energy
property otherwise qualifies under section 48 of the Code.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representative.

    This ruling is directed only to the Taxpayer who requested it. Section 6110(k)(3)

of the Code provides it may not be used or cited as precedent. We are sending a copy
of this letter ruling to the Industry Director.

                                 Sincerely,



                                 Peter C. Friedman
                                 Senior Technician Reviewer, Branch 6
                                 Office of Associate Chief Counsel (Passthroughs
                                 & Special Industries)