Understanding energy rebates tax treatment

ARTICLE | April 29, 2024

Authored by RSM US LLP

Executive summary

The IRS released new guidelines regarding the tax treatment with respect to Department of Energy (DOE) Home Energy Rebate Programs funded by the Inflation Reduction Act of 2022. According to the guidelines, homeowners who receive rebates should consider them as purchase price adjustments which are not includible in their gross income. On the other hand, businesses that receive rebates in connection with the sale of goods or provision of services to a purchaser must report them as taxable income. Additionally, those who are eligible for DOE rebates and section 25C credits must make necessary reductions to their expenditures eligible for the section 25C credit. This will promote sustainable investments and encourage people to adopt energy efficient measures.

The IRS recently issued Announcement 2024-19, which provides a detailed explanation of the federal income tax treatment of rebates under the Department of Energy (DOE) Home Energy Rebate Programs (a program established under the 2022. This guidance outlines the program's background, specifies the tax implications for purchasers and businesses, and explains how these rebates interact with other tax credits.

The DOE Home Energy Rebate Programs encourage homeowners to invest in energy-efficient home improvements and electrification projects. By allocating funds for rebate programs focused on whole-house energy savings and high-efficiency electrification, the Act seeks to alleviate the energy burden on low-income households and foster sustainable energy practices.

Tax implications for homeowners

Under the announcement, rebates received by homeowners for whole-house energy-savings retrofits or qualified electrification projects are treated as purchase price adjustments. This classification significantly lowers the financial barrier to energy-efficient home upgrades by ensuring these rebates do not contribute to the homeowner's gross income, which is in line with previous tax rulings and policies promoting energy conservation. Taxpayers, however, must reduce their cost basis in the property by the amount of the rebate.

Rebate payments to homeowners, recognized as adjustments to the purchase price, are exempt from information reporting requirements under section 6041 of the Code. Consequently, the entity issuing the rebate is not obligated to submit an information return to the IRS or provide the purchaser with a statement detailing the rebate payments.

Tax implications for businesses

Unlike individual homeowners, business entities must include rebate amounts in their gross income. The announcement also clarifies reporting requirements for organizations that make the rebate payment and when such reporting under section 6041 of the Code is required.

Understanding the inclusion or exclusion of rebates in gross income

The tax treatment of rebates, as detailed in Rev. Ruls. 91-36 and 76-96, provides crucial context for why rebates are treated differently in the tax code. Rev. Ruls. 91-36, for instance, highlights that noncash incentives from utility companies for participating in energy conservation programs are not considered part of the taxpayer's gross income. Similarly, Rev. Ruls. 76-96 states that cash rebates from automobile manufacturers reduce the vehicle's purchase price and are not taxable income.

Both rulings highlight a fundamental principle: rebates that effectively reduce the purchase price of a product or service are not to be treated as taxable income. For taxpayers, this means that such rebates lower the out-of-pocket costs for certain purchases without increasing their tax liabilities. For businesses, particularly those receiving rebates, these amounts are recognized in the taxpayer's gross income under section 61. This treatment ensures that the economic reality of rebate transactions is accurately reflected in tax calculations.

Coordination with the section 25C Energy Efficient Home Improvement Credit

Recipients of DOE Home Energy Rebate Programs must account for these rebates when calculating the section 25C credit, ensuring that the rebate amount reduces the total amount of qualified expenditures. This adjustment is crucial for taxpayers eligible for both DOE rebates and the section 25C credit, ensuring that they do not receive a double benefit and that tax incentives accurately reflect their actual investment in energy efficient property.

Washington National Tax Takeaways

Key takeaways include understanding the favorable tax treatment of energy-efficient upgrades for homeowners who benefit from rebates not being treated as taxable income. This effectively lowers the cost of such improvements, encouraging greener living without the burden of increased taxes. On the business side, entities must incorporate received rebates into their gross income.

The detailed guidance ensures that individuals and businesses can navigate these incentives effectively, maximizing the impact of the Inflation Reduction Act on the nation's transition to a more energy-efficient and sustainable future. It highlights the government's effort to incentivize energy efficiency through tax benefits, offering a financial boost to those investing in sustainable home solutions.

The IRS recently updated its FAQ document (Fact Sheet 2024-15) to address the guidance in Announcement 2024-19 on the federal income tax treatment of these incentives.