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 five years under 00.00D, as described in §48(1)(3)(viii) or (iv), or §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.[i]
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) §48(1)(4) of the Code.
Former §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 §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 §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 §38 property under §48(l)(1) remain §1250 property and are not §1245 property.” Treas. reg. §1.48-9(b)(1)(iii).
So these assets are five-year property, but still §1250. If installed on residential rental property, energy property also qualifies for §179, which is unusual, since §179 does not generally apply to residential rental properties.