June 18, 2015

As we seek solutions for ever greener buildings, the use of renewable energy sources are going to be increasingly common as are questions regarding the proper treatment of these assets. For most Alternative Energy Property, MACRS clearly proscribes a GDS tax life of 5 years under 00.00D, as described in sections 48(1)(3)(viii) or (iv), or section 48(1)(4) of the Code. The question is, does asset class 00.00D apply only to assets used in the production of electricity or does it also apply equally to assets used in direct heating such as solar powered water heaters?

Wikipedia describes solar powered water heaters as:

In order to heat water using solar energy, a collector, often fastened to a roof or a wall facing the sun, heats a working fluid that is either pumped (active system) or driven by natural convection (passive system) through it. The collector could be made of a simple glass-topped insulated box with a flat solar absorber made of sheet metal, attached to copper heat exchanger pipes and dark-colored, or a set of metal tubes surrounded by an evacuated (near vacuum) glass cylinder. In industrial cases a parabolic mirror can concentrate sunlight on the tube. Heat is stored in a hot water storage tank.

As with other Alternative Energy Property, solar water heaters (or combo water heater/electric generation units) are also 00.00D assets. Those assets include property described in (former) section 48(1)(4) of the Code.

Former section 48(l)(4) provides that “[t]he term ‘solar or wind energy property means any equipment which uses solar or wind energy–

(A) to generate electricity,
(B) to heat or cool (or provide hot water for use in) a structure, or
(C) to provide solar process heat.”

This is also a five-year statutorily prescribed recovery period from section 168(e (3)(B)(vi)(I). The only difference is that the statutory recovery period explicitly does not include property used to generate energy to heat swimming pools.

The regulations issued under former section 48(l) provide that: “Section 48(l)(1) does not affect the character of property under sections of the Code outside the investment credit provisions. For example, structural components of a building that are treated as section 38 property under section 48(l)(1) remain section 1250 property and are not section 1245 property.” Treas. reg. section 1.48-9(b)(1)(iii).

So these assets are five-year property, but section 1250. If installed on residential rental property, energy property also qualifies for section 179, which is pretty neat, since section 179 does not generally apply to residential rental properties.