Tax Treatment of Home Energy Rebates

The IRS has recently issued guidance on the federal income tax treatment of state-offered home energy rebates funded by the U.S. Department of Energy (DOE). This guidance is important for homeowners looking to take advantage of the rebates under the Inflation Reduction Act of 2022 for energy-efficient home improvements.

Home Energy Rebate Programs Overview

The Inflation Reduction Act of 2022 introduced rebate provisions to encourage energy-efficient home retrofits and electrification projects. These programs are managed by state energy offices, with the DOE providing necessary oversight and guidance.

Home Energy Efficiency Retrofit Rebates

Eligibility and Benefits

For home energy efficiency retrofit projects, rebates are available based on the projected energy savings:

• 20% Energy Savings: Households may be able to receive a rebate covering 80% of project costs, up to $4,000. For households with income above 80% of the area median income (AMI), the rebate covers 50% of costs, up to $2,000.
• 35% Energy Savings: Households may be able to receive a rebate covering 80% of project costs, up to $8,000. For households with income above 80% of AMI, the rebate covers 50% of costs, up to $4,000.

Home Electrification and Appliance Rebates

Eligibility and Benefits

For home electrification and appliance projects, rebates can cover 100% of project costs, up to a total of $14,000. The specific technology cost maximums range from $840 for an Energy Star electric stove to $8,000 for an Energy Star electric heat pump. However, for households with income above 80% of AMI, the rebate covers only 50% of costs. Households with income above 150% of AMI are not eligible for these rebates.

Federal Income Tax Treatment

Rebates to Purchasers

Rebates paid to or on behalf of a purchaser under these DOE programs are not included in the purchaser's gross income. Instead, they are considered a purchase price adjustment for federal income tax purposes:

• At the Time of Sale: The rebate is not included in the cost basis of the property.
• Post-Sale: The tax basis of the property is reduced by the rebate amount.

Rebates to Business Taxpayers

If rebate payments are made directly to a business taxpayer, such as a contractor, these payments must be included in the business taxpayer's income.

Coordination with Energy Efficient Home Improvement Credit

Eligibility for Tax Credit

Taxpayers may also be eligible for an energy-efficient home improvement credit, which covers 30% of qualified expenditures, up to $3,200 annually. However, if a DOE home energy rebate is received, the amount used to calculate this credit must be reduced by the rebate amount.

Pro Rata Allocation

If items are eligible for both the DOE home energy rebate and the energy-efficient home improvement credit, taxpayers can allocate the rebate amounts proportionally to the total project cost to determine the credit.

Understanding the IRS's guidance on the federal income tax treatment of state-provided home energy rebates is essential for homeowners and business taxpayers. By effectively leveraging these rebates and tax credits, significant savings on energy-efficient home improvements can be achieved, promoting a more sustainable future.