Deprecation on a Schedule C

[Havinfunone]

A client came to me from another preparer. In reviewing his prior year I found a Schedule C with no income just a $10,000 deprecation. I went back to the year prior to that and figured out what the client had done. He had made a deal with his solar installer to allow potential clients to come over and look at his installation and ask questions. For this he received a substantial discount. The year this happened he claimed the discount as income on a Schedule C and expensed the cost of the solar panels as a depreciable deduction. The following year he just claimed the depreciation but no new income. He is wanting to do this again this year. 

Anyone have any thoughts?

[sjrcpa]

I think it smells.

Some solar companies sold this idea.

[sjrcpa]

Did he take the solar credit on the full pre discount price, too?

[TaxGuyBill · Accepted solution]

Schedule C is a business.  A business is an ongoing activity that tries to make a profit.  What did he do THIS YEAR to try to make a profit?

[Havinfunone]

That is where my head was, just wanted to hear it bounce back. Thanks

[qbteachmt]

I think you have two scams here.

The discount wasn't income and is not a business activity.

The generation isn't a business activity, either.

The latter idea was sold by solar installer companies with the stamp of approval of "our CPA." They even posted the approval letter. The strategy is, if your solar installation has a production value for meter reversal as credits or Net Metering, they tell the residential owner to treat it as production.

[BobKamman]

Sometimes there is a kernel of truth in what is otherwise a scam. In many places, utilities are required to buy back the homeowner’s excess power generation from solar installations. This is first applied to the owner’s bill for delivered electricity, but it’s possible for actual cash payment to be made if the credit is more than the bill. Does IRS tax this? Why not? It’s like renting a room in your house, but it’s space on your rooftop instead.

I found a PowerPoint presentation on this that concludes, “Note: if the customer is a net exporter of electricity and receives a check, the customer has income.” It’s by a Harvard Law graduate:

https://tinyurl.com/29wd9t2z

Let’s say a vendor sells a $20,000 system to a homeowner for $30,000, because these buyers don’t care how much they have overpaid as long as they get a tax credit to offset some of the gouging. Then it turns out that 95% of the power generated is used at home, but 5% is sold back to the power company. Shouldn’t 5% of the unit’s cost (net of tax credits) be allowed as a deduction, if the payment is taxable?