Rev. Rul. 85-26

1985-1 C.B. 16, 1985-11 I.R.B. 4.

BUSINESS ENERGY CREDIT; COMPUTATION WHEN ENERGY PROPERTY IS ALSO USED FOR

RESIDENTIAL PURPOSES

Published: March 18, 1985

Section 46.-Amount of Credit, 26 CFR 1.46-1: Determination of amount.

  Business energy credit; computation when energy property is also used for residential purposes. Methods are described for computing the business energy credit when a wind-driven generator's output is also used for residential purposes.

ISSUE

  If A, an individual, installs a wind-driven generator that produces electricity for the dormitories of A's employees as well as for A's own residence in which A's office is located, how is the business energy investment credit, allowable under section 46 of the Internal Revenue Code, computed if A also claims the credit allowable under section 23 (section 44C, prior to redesignation by the Tax Reform Act of 1984) for the residential usage?

FACTS

  In 1982 A installed a wind-driven electrical generator on A's farm property located in the United States. The electricity is delivered by separately metered lines to the dormitories that house A's employees and to A's residence in which A's office is located. Forty percent of the electricity produced is used in A's residence, exclusive of the office, 10 percent is used in the office, and 50 percent is used in the dormitories. A's total installation cost for the wind-driven apparatus is $50,000. The wind-driven generator satisfies all the eligibility requirements as wind energy property for purposes of section 46 of the Code and renewable energy source property for purposes of section 23 of the Code. A has never previously been allowed a residential energy credit.

LAW AND ANALYSIS

  Section 46(b)(2)(A) of the Code (section 46(a)(2)(C) prior to the Tax Reform Act of 1984) provides that the amount of the energy percentage for the business energy investment credit allowed by section 38 for the taxable year is 15 percent for qualified wind energy property for the period beginning on January 1, 1982 and ending on December 31, 1985.

  Section 23(b)(2) of the Code allows a residential energy credit for qualified renewable energy source expenditures in the amount of, in the case of a principal residence, 40 percent of so much of the renewable energy source expenditures made by the taxpayer during the taxable year for the residence as does not exceed $10,000.

  Section 23(c)(7)(D) of the Code provides that if less than 80 percent of the use of an item is for nonbusiness residential purposes, only that portion of the expenditures for such item which is properly allocable to use for nonbusiness residential purposes shall be taken into account.

  Section 1.44C-3(g) of the Income Tax Regulations provides that if at least 80 percent of the use of a component or item of property is for personal residential purposes, the entire amount of the renewable energy source expenditure is taken into account in computing the credit. If less than 80 percent of the use of a component or item of property is for personal residential purposes, the amount of an expenditure taken into account is the amount that bears the same ratio to the amount of the expenditure as the amount of personal residential use of the component or item bears to the total use.

  In the present case, A's use of the generator's electrical output for nonbusiness residential purposes is less than 80 percent. Because A's qualified residential expenditure of $20,000 (40 percent use of $50,000) is in excess of the $10,000 section 23(b)(2) limitation, A's allowable residential energy credit for 1982 is $4,000 (.40 of $10,000).

  The portion of A's usage of the generator's output that was used for business residential purposes and eligible for the business energy investment credit is 60 percent (10 percent for the office usage and 50 percent for employee usage). Thus, $30,000 (.60 x $50,000) is the amount to which the energy percentage is applied. A's allowable business energy investment credit for 1982 under section

46 of the Code is $4,500 (.15 x $30,000).

  If in the above example at least 80 percent of the generator's output were used in A's residence, exclusive of the office, the entire generator cost would have been taken into account for purposes of computing the credit under section 23(b) of the Code. Because the entire amount of the generator's output is deemed used in connection with taxpayer's principal residence for credit purposes, no portion of the expenditures would be taken into account in determining the business energy credit except to the extent that the cap on the residential energy credit prevents the taxpayer from realizing the benefit of the entire amount of the expenditure for purposes of the residential energy credit. That is, no portion of an expenditure can qualify for both the residential energy credit and the business energy credit.

  Since under section 23(b)(2) of the Code, only $10,000 of the expenditure can qualify for the residential energy credit, a taxpayer having a qualifying expenditure with at least 80 percent residential usage can claim the business energy credit on the amount of the expenditure that both exceeds the section 23(b)(2) limitation and is attributable to business usage. For example, if the entire qualifying expenditure were $11,000 with 20 percent business usage (or $2,200) the amount that both exceeds the residential limitation and is attributable to business use is $1,000. Similarly, if the entire qualifying expenditure were $20,000 with 20 percent business usage (or $4,000), the amount that both exceeds the residential limitation and is attributable to business use is $4,000.

HOLDING

  If A installs a wind-driven generator that produces electricity for the dormitories of A's employees as well as for A's own residence in which A's office is located and claims the credit allowed by section 23 of the Code, the business energy investment credit allowable under section 46 is computed by using the portion of the generator's production used for nonresidential purposes if less than 80 percent of the generator's output is used for nonbusiness residential purposes. However, if at least 80 percent of the generator's output is used for nonbusiness residential purposes, the entire amount of the expenditure is deemed used for residential purposes in computing the credit allowed by section 23 of the Code, and a business energy credit is not allowed on any portion of that amount that results in a residential energy credit.

Rev. Rul. 85-26, 1985-1 C.B. 16, 1985-11 I.R.B. 4.