Dear IRS... What are your thoughts on depreciation?

Paying the Tax (The Tax Collector), Circa 1640

Dear IRS

In Germany if you install a solar power system you automatically become a small business that sells electricity back to the grid. As small solar businesses, German home owners with PV systems are allowed to depreciate those systems using a linear and or declining balance schedule. I am curious why home owners in the US are not allowed to depreciate their solar power systems? The rule says:

"This property (depreciable property) is generally limited to tangible, depreciable, personal property which is acquired by purchase for use in the active conduct of a trade or business. "

When you install a solar power system you are involved in the active conduct of trade with the electricity grid. Note also that you are trading electricity with entities that are capable of depreciating their generating stations. Does the IRS intend to classify residential solar power systems as a depreciable asset? If so, what's the time frame? If not, why not?

Respectfully,
Photomofo


Dear Photomofo

Thank you for your questions, whether when you install a solar power system you are involved in the active conduct of trade with the electricity grid, therefore the residential solar power system would become a depreciable asset.

There is no provision in the U.S. Internal Revenue Code (enacted by the U.S. Congress), that if you install a solar power system you automatically become a small business because you sell electricity back to the grid.

Per Publication 334, Tax Guide for Small Business:

Trade or business. A trade or business is generally an activity carried on to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need to make ongoing efforts to further the interests of your business.

You do not have to carry on regular full-time business activities to be self-employed. Having a part-time business in addition to your regular job or business may be self-employment.

Per Publication 535, Business Expenses:

In determining whether you are carrying on an activity for profit, several factors are taken into account. No one factor alone is decisive. Among the factors to consider are whether:

-You carry on the activity in a businesslike manner,
-The time and effort you put into the activity indicate you intend to make it profitable,
-You depend on the income for your livelihood,
-Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
-You change your methods of operation in an attempt to improve profitability,
-You (or your advisors) have the knowledge needed to carry on the activity as a successful business,
-You were successful in making a profit in similar activities in the past,
-The activity makes a profit in some years, and
-You can expect to make a future profit from the appreciation of the assets used in the activity.

Based on the above rules, the taxpayer would have to be in a trade or business of generating and selling electricity, to be able to depreciate the residential solar power systems.

If you are in the trade or business of generating and selling electricity, you could only depreciate the portion of the solar system that is used in that trade or business. The part of the solar system that is used for your home would be considered personal use and not depreciable.

*Underlined by Yours Truly