Taxation of Utility and Similar Rebates
In recent years, an ever-increasing number of American households have become more environmentally conscious. This has led families around the country to switch to artificial turf lawns, install solar panels, purchase EnergyStar appliances, and more.
Manufacturers and government agencies at various levels -- municipal, state, and federal -- have begun offering utility rebates for households who switch to cleaner energy. Learn what this may mean for your taxes below.
Energy Conservation Rebates
Taxpayers can exclude from gross income any subsidy provided, either directly or indirectly (for example, as when a third party (such as a contractor) receives the subsidy on the taxpayer’s behalf), by public utilities for the purchase or installation of an energy conservation measure for a dwelling unit. This includes installations or modifications that are primarily designed to reduce consumption of electricity or natural gas or improve the management of energy demand. (IRC Sec 136) However, the cost of the energy conservation property must be reduced by the amount of the nontaxable subsidy before computing any federal tax credit that’s based on the costs of that property, as for example when claiming the solar electric or solar water property credit. (2021 Form 5695 instructions, page 1)
Water Conservation Rebates
Federal tax law does not include water conservation rebates with energy rebates. Although there has been extensive lobbying by utilities to change that law, at the present time it appears such rebates are taxable for federal purposes. This would also include the rebates to replace grass with artificial turf. Utilities require water conservation rebate recipients to complete a W-9 and will issue them a 1099 where the rebates are $600 or more.
Energy Efficient Property Rebates
The IRS announced (IRS Ann 2024-19; IR 2024-97) that amounts received from the Department of Energy (DOE) home energy rebate programs funded through the Inflation Reduction Act (IRA) will be treated as a reduction in the purchase price or cost of property for eligible upgrades and projects. Accordingly, the consumer that has received an IRA rebate would not be required to report the value of the rebate as income.