Selling Solar Credits and Reporting the Income

Owners of solar energy systems can generate and sell credits, creating an additional revenue stream. This process transforms solar production into a tradable asset, supported by mechanisms designed to incentivize renewable energy. This financial opportunity is distinct from direct savings on electricity bills and represents a separate income source derived from the environmental attributes of solar power.

Types of Sellable Solar Credits

Two primary types of sellable assets are available to solar system owners. The most common is the Solar Renewable Energy Certificate (SREC), which represents the “green” value of solar power. One SREC is created for every megawatt-hour (MWh) of electricity a solar system generates. These certificates have monetary value because some states have Renewable Portfolio Standards (RPS) that mandate utilities source a percentage of their electricity from renewables, sometimes with a “solar carve-out” for solar-specific generation. Utilities purchase SRECs from solar owners to meet these legal obligations and avoid financial penalties.

Another asset is the transferable federal tax credit, a mechanism expanded by the Inflation Reduction Act of 2022. This is a one-time sale of a tax incentive, like the Investment Tax Credit (ITC), not an ongoing revenue stream. While the Residential Clean Energy Credit cannot be sold by homeowners, the commercial ITC for larger systems can be transferred. This allows a business that cannot use the full tax credit to sell it for cash to an unrelated party, helping to finance a project.

Eligibility and Registration Requirements

To generate and sell SRECs, a solar system owner must meet eligibility criteria dictated by state-level programs. The system must be located in a jurisdiction with an active SREC market. The system owner must also hold the title to the equipment, as individuals who lease panels or use a Power Purchase Agreement (PPA) are not eligible. Finally, the system must be interconnected with the local utility grid.

Registration is a required step to become a qualified generator of credits. This involves submitting a detailed application to the state’s designated program administrator or tracking system, such as the PJM Generation Attribute Tracking System (GATS). System owners need documentation including proof of ownership, interconnection agreements, and detailed system specifications like its size, panel model, and inverter type. A certified revenue-grade meter is also required to accurately measure production for verification. While many solar installers handle this registration, owners can register themselves or hire a specialized SREC company.

The Selling Process

After a system is registered, the owner can sell the SRECs it generates. The most common method for residential owners is to work with an SREC aggregator or broker. These companies act as intermediaries, bundling SRECs from many small generators into larger blocks attractive to utility buyers and handling the transaction complexities for a commission.

Sellers have a few transaction models to choose from. One option is to sell SRECs on the spot market, where the price is determined by current supply and demand, offering higher potential returns but also price volatility. Another approach is to enter a long-term contract with an aggregator for a set period, such as three or five years. This model provides price stability by locking in a fixed rate for each SREC, which can simplify financial planning.

To sell through an aggregator, an owner creates an account and links their registered solar system. The aggregator tracks energy production and sells each SREC once it is generated and verified. Payment is then issued to the system owner via direct deposit, minus the aggregator’s fee. The process for selling a transferable federal tax credit is different and more complex, requiring specialized legal and financial agreements.

Tax Reporting for Solar Credit Sales

Income from selling SRECs has tax implications. The Internal Revenue Service (IRS) has not issued a formal ruling on the tax treatment of SREC sales for all taxpayers. However, a non-precedential private letter ruling concluded that the income was taxable as ordinary income and did not reduce the solar system’s cost basis. While this indicates the IRS’s likely position, taxpayers should consult a tax professional.

When selling SRECs, owners must follow reporting requirements. If total payments from a single payer in a calendar year are $600 or more, the payer must issue a Form 1099-MISC to the recipient. Even if a 1099-MISC is not received, the income must still be reported to the IRS.

This income is reported on a personal tax return as “Other Income.” The amount from Box 3 of Form 1099-MISC is entered on Schedule 1 (Form 1040), Additional Income and Adjustments to Income. Because this is not considered income from a self-employed trade or business for a homeowner, it is not subject to self-employment taxes. For the sale of a federal tax credit, the tax treatment is different. The cash payment a taxpayer receives for selling an eligible tax credit is not included in the seller’s gross income, and the buyer is not permitted to deduct the purchase price.