Two home energy rebates not includible in gross income, IRS says

Rebates paid at the time of sale under two home energy rebate programs created in the Inflation Reduction Act are not includible in individual purchasers’ gross income or cost basis, the IRS said Friday in Announcement 2024-19. The announcement also includes coordination rules for taxpayers who want to claim a federal tax credit for those amounts under Sec. 25C.

The Inflation Reduction Act of 2022, P.L. 117-169, appropriated money and authorized the Energy Department to administer two rebate programs under Secs. 50121 and 50122, one for whole-house retrofits that save money and another for high-efficiency home electrification projects.

IRS treatment of rebates

• A rebate paid to or on behalf of a purchaser will be treated as a purchase price adjustment for federal tax purposes and is not included in the purchaser’s gross income under Sec. 61, the announcement said.
• A rebate paid at the time of sale is not included in a purchaser’s cost basis under Sec. 1012, the announcement said. For example, if the purchaser receives a $500 rebate at the time of sale of eligible property with a sales price of $600, then the purchaser’s cost basis in the property is $100, not $600.
• The amount of a rebate provided later constitutes an adjustment to basis under Sec. 1016. For example, if a purchaser spends $600 to buy eligible property in 2023 but later receives a $500 rebate, then the purchaser’s cost basis is reduced to $100 from $600 when the rebate is provided.
• The payer of a rebate is not required to file an information return with the IRS or provide a statement to the purchaser to report the payments of rebate amounts to the purchaser, per Sec. 6041.
• Rebate payments made directly to a business taxpayer in connection with the business taxpayer’s sale of goods or provision of services to a purchaser are not excluded from that taxpayer’s gross income under Sec. 61.

In addition, the IRS explained how the rebates coordinate with the Sec. 25C credit, which allows taxpayers to receive a credit of up to 30% of certain qualified expenditures that go toward energy-efficient improvements to their homes. The credit generally is capped annually at $1,200 with another $2,000 annual cap for improvements that include electric or natural gas heat pumps, electric or natural gas heat pump water heaters, or biomass stoves and boilers.

Taxpayers who receive rebates under the DOE home energy rebate programs and who are also eligible for the Sec. 25C credit must reduce the amount of the amount of qualified expenditures used to calculate credit by the amount of the rebate. For example, if a taxpayer receives a $100 rebate for a $400 product, then the 30% credit applies to the remaining $300, for a credit of $90.

If a taxpayer purchases an item or items eligible for both rebates and the Sec. 25C credit, to determine the amounts paid for the items, the taxpayer may allocate the rebates pro rata to individually itemized expenditures as a share of total project cost.

The IRS gave as an example that if a taxpayer receives a $2,000 rebate for a whole-house energy-saving retrofit and allocates it proportionately, 60% to $3,000 in qualifying expenditures for a heat pump ($1,200 of the $2,000 rebate) and 40% to $2,000 in qualifying expenditures for insulation ($800 of the $2,000 rebate), the taxpayer may treat the amount paid or incurred for the heat pump as $1,800 ($3,000 less the $1,200 allocated portion of the rebate) and the amount paid or incurred for the insulation as $1,200 ($2,000 less the $800 allocated portion of the rebate).

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.