In this research, we show how a Distributed Incremental Adaptive Filter (DIAF) may be used to efficiently manage a utility-interfaced Photovoltaic (PV) - battery microgrid for high power quality. The grid needs to be turned on in case of a blackout. However, the PV-battery system is intended to keep serving critical loads even if the distribution network goes down. Unpredictable power delivery from PV arrays due to unexpected weather changes can be mitigated with the use of a bidirectional controlled converter and a battery. The Voltage Source Converter (VSC) receives the most available power and splits it between the main power source and the nonlinear loads. The VSC is controlled by the DIAF and is powered by the PV array and the battery system. When the system is coupled to nonlinear loads, the DIAF-driven control not only provides regulated power distribution, but also reduces harmonics, effectively balances loads, and boosts power factor. A PV Power Feed- Forward (PVFF) component is included to enhance the current regulation. This not only enhances the dynamic operations of a residential PV-battery microgrid, but also allows for the injection of active electricity into the main grid. In addition to enhancing fuel efficiency, the Battery Energy Storage (BES) helps maintain microgrid stability. This study proves that a PV-battery microgrid constructed in a lab can function as intended.