Guidance Addresses Tax Treatment of Rebates on Purchases of Energy Efficient Property

(Parker Tax Publishing April 2024)

The IRS issued guidance that addresses the federal income tax treatment of amounts paid for the purchase of energy efficient property and improvements as part of the Department of Energy's "Home Energy Rebate Programs" under the Inflation Reduction Act of 2022 (Pub. L. 117-169). The announcement also provides coordination rules for taxpayers who receive such amounts and wish to claim a tax credit for energy efficiency improvements under Code Sec. 25C. Announcement 2024-19.

Background

Sections 50121 and 50122 of the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169) appropriate funds to and authorize the U.S. Department of Energy (DOE) to carry out two DOE-administered programs for whole-house energy saving retrofits and high-efficiency home electrification projects (DOE Home Energy Rebate Programs). First, Section 50121 of the IRA directs DOE to distribute funds to state energy offices to establish rebate programs for owners of residential property for whole-house energy-saving retrofits. Second, Section 50122 of the IRA directs DOE to distribute funds to state energy offices and Indian Tribes to establish rebate programs for owners and occupants of residential property for qualified electrification projects.

Pursuant to the DOE program guidance, states, the District of Columbia, and U.S. Territories are submitting applications to DOE for an allocation of funding to participate in one or both of the DOE Home Energy Rebate Programs. Indian Tribes will be submitting applications to DOE for an allocation of funding pursuant to only Section 50122 of the IRA. Participating states, the District of Columbia, any political subdivisions or agencies or instrumentalities of any one or more of the foregoing (State Organizations), Indian Tribes, and U.S. Territories will implement programs to provide rebates for the ultimate benefit of property owners and occupants at the time of sale or shortly thereafter to reduce the out-of-pocket cost for goods and services constituting a whole-home energy saving retrofit or qualified electrification project of the residential property owner or end consumer of the goods or services provided (purchasers).

Announcement 2024-19

In Announcement 2014-19, the IRS addresses the federal income tax treatment of amounts paid for the purchase of energy efficient property and improvements as part of the DOE Home Energy Rebate Programs. The announcement also provides coordination rules for taxpayers who receive such amounts and wish to claim a federal tax credit under Code Sec. 25C.

Treatment of DOE Home Energy Rebates to Purchasers

According to the IRS, a rebate paid to or on behalf of a purchaser pursuant to either of the DOE Home Energy Rebate Programs will be treated as a purchase price adjustment for the purchaser for federal income tax purposes. Any such rebate is, therefore, not includible in the purchaser's gross income under Code Sec. 61.

To the extent a rebate is provided at the time of sale, the IRS states that the amount of the rebate provided in connection with the DOE Home Energy Rebate Programs is not included in a purchaser's cost basis under Code Sec. 1012. For example, if a $500 rebate is provided at the time of sale of eligible property with a sales price (before the rebate) of $600, then the purchaser's cost basis in the property is only $100 (not $600). To the extent a rebate is provided at a later time, the amount of the rebate constitutes an adjustment to basis under Code Sec. 1016. For example, if a purchaser spends $600 to purchase eligible property in 2023 but later receives a $500 rebate, then the purchaser's cost basis in the property is reduced from $600 to $100 when the rebate is provided to the purchaser.

The IRS also states that payments of rebate amounts to the purchaser that are treated as a purchase price adjustment are not subject to information reporting under Code Sec. 6041, which generally requires payors of amounts of $600 or more paid to a person to file information returns with the IRS and furnish statements to the person paid. Accordingly, the payor of the rebate is not required to file an information return with the IRS or furnish a statement to the purchaser to report the payments of rebate amounts to the purchaser.

Treatment of DOE Home Energy Rebates to Certain Business Taxpayers

The IRS further advises in Announcement 2024-19 that payments of rebate amounts made directly to a business taxpayer, such as a contractor as defined in the DOE program guidance, pursuant to either of the DOE Home Energy Rebate Programs in connection with the business taxpayer's sale of goods or provision of services to a purchaser are not excluded from such business taxpayer's gross income under Code Sec. 61. Accordingly, payments of rebate amounts that are includable in a business taxpayer's gross income must be taken into account in computing such business taxpayer's taxable income under Code Sec. 63 and other applicable rules under the Code.

In addition, payments of rebate amounts made directly to a business taxpayer of $600 or more that are includable in the business taxpayer's gross income and are not solely attributable to gross receipts from the sale of goods may be subject to information reporting under Code Sec. 6041 by the State Organization or Indian Tribe making the rebate payment unless the business taxpayer to whom the rebate payment is made is a taxable corporation or if another exception applies. If information reporting is required under Code Sec. 6041, information returns must be furnished to the business taxpayer on Forms 1099 and W-2, as applicable.

Coordination of Rebates Under DOE Home Energy Rebate Programs with Sec. 25C Credit

The IRA amended Code Sec. 25C to provide an expanded federal income tax credit for energy efficiency improvements, including certain onsite installation costs. Starting in 2023, taxpayers can receive a credit under Code Sec. 25C of up to 30 percent of certain qualified expenditures for making energy efficiency improvements to their home (Section 25C credit). The Section 25C credit is generally limited to an annual cap of $1,200, with an additional $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.

The IRS states in Announcement 2024-19 that taxpayers who receive rebates under the DOE Home Energy Rebate Programs who are also eligible for the Section 25C credit must reduce the amount of qualified expenditures used to calculate the Section 25C credit by the amount of the rebate from the DOE Home Energy Rebate Program. For example, if a taxpayer purchases an eligible product for $400 and receives a $100 rebate for this purchase through a DOE Home Energy Rebate Program, the taxpayer may claim a 30 percent credit with respect to the remaining $300 of qualifying expenditures, resulting in a Section 25C credit equal to $90 (not $120). A taxpayer must not include the amount of any rebate received or provided at a later time in calculating their Section 25C credit.

In addition, if a taxpayer purchases item(s) eligible for both rebates under Section 50121 of the IRA and the Section 25C credit, the taxpayer may make a pro rata allocation of amounts received as rebates to individually itemized expenditures as a share of total project cost in determining the amounts paid or incurred for such items under Code Sec. 25C. For example, if a $2,000 rebate for a whole-house energy-saving retrofit is proportionately allocated 60 percent to $3,000 in qualifying expenditures for a heat pump ($1,200 of the $2,000 rebate) and 40 percent 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 and the insulation as $1,800 ($3,000 less the $1,200 allocated portion of the rebate) and $1,200 ($2,000 less the $800 allocated portion of the rebate), respectively, for purposes of the Section 25C credit.

For a discussion of the exclusion from income for cash rebates and other purchase incentives, see Parker Tax ¶76,205. For a discussion of the energy efficient home improvement credit under Code Sec. 25C, see Parker Tax ¶101,505.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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