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Home / Articles / New IRS Guidance: Tax Treatment for Energy Efficiency Rebates

New IRS Guidance: Tax Treatment for Energy Efficiency Rebates

April 18, 2024

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The Inflation Reduction Act (IRA) introduced and broadened several incentives aimed at encouraging taxpayers to boost their use of renewable energy sources and embrace various energy-efficient upgrades. Notably, the legislation allocates funding of nearly $9 billion towards home energy rebates.

Although the rebates are not currently accessible, numerous states are anticipated to roll out their programs in 2024. Additionally, the IRS has recently issued vital guidance (Announcement 2024–19) outlining its approach to the tax treatment of these rebates.

Home Energy Rebates

The home energy rebates are available for two types of improvements. Home Efficiency Rebates apply to whole-house projects that are predicted to reduce energy usage by at least 20%. These rebates are applicable to consumers who reduce their household energy use through efficiency projects. Examples include the installation of energy efficient air conditioners, windows and doors.

The maximum rebate amount is $8,000 for eligible taxpayers with projects with at least 35% predicted energy savings. All households are eligible for these rebates, with the largest rebates directed to those with lower incomes. States can choose to provide a way for homeowners or occupants to receive the rebates as an upfront discount, but they aren’t required to do so.

Home Electrification and Appliance Rebates are available for low- or moderate-income households that upgrade to energy efficient equipment and appliances. They’re also available to individuals or entities that own multifamily buildings where low- or moderate-income households represent at least 50% of the residents. These rebates cover up to 100% of costs for lower-income families (those making less than 80% of the area median income) and up to 50% of costs for moderate-income families (those making 80% to 150% of the area median income). According to the Census Bureau, the national median income in 2022 was about $74,500 — meaning some taxpayers who assume they won’t qualify may indeed be eligible.

Depending on your state of residence, you could save up to:

  • $8,000 on an ENERGY STAR-certified electric heat pump for space heating and cooling
  • $4,000 on an electrical panel
  • $2,500 on electrical wiring
  • $1,750 on an ENERGY STAR-certified electric heat pump water heater
  • $840 on an ENERGY STAR-certified electric heat pump clothes dryer and/or an electric stove, cooktop, range or oven

The maximum Home Electrification and Appliance Rebate is $14,000. The rebate amount will be deducted upfront from the total cost of your payment at the “point of sale” in participating stores if you’re purchasing directly or through your project contractors.

Rebates and Taxable Income

In the wake of the IRA’s enactment, questions arose about whether home energy rebates would be considered taxable income by the IRS. The agency has now put the uncertainty to rest, with guidance stating that rebate amounts won’t be treated as income for tax purposes. However, rebate recipients must reduce the basis of the applicable property by the rebate amount.

If a rebate is provided at the time of sale of eligible upgrades and projects, the amount is excluded from a purchaser’s cost basis. For example, if an energy-efficient equipment seller applies a $500 rebate against a $600 sales price, your cost basis in the property will be $100, rather than $600.

If the rebate is provided at a later time, after purchase, the buyer must adjust the cost basis similarly. For example, if you spent $600 to purchase eligible equipment and later receive a $500 rebate, your cost basis in the equipment drops from $600 to $100 upon receipt of the rebate.

The Energy Efficient Home Improvement Credit

The IRS guidance also addresses how the home energy rebates affect the Energy Efficient Home Improvement Credit. As of 2023, taxpayers can receive a federal tax credit of up to 30% of certain qualified expenses, including:

  • Qualified energy efficiency improvements installed during the year
  • Residential energy property expenses
  • Home energy audits

The maximum credit each year is:

  • $1,200 for energy property costs and certain energy-efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150)
  • $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers

Taxpayers who receive home energy rebates and are also eligible for the Energy Efficient Home Improvement Credit must reduce the amount of qualified expenses used to calculate their credit by the amount of the rebate. For example, if you purchase an eligible product for $400 and receive a $100 rebate, you can claim the 30% credit on only the remaining $300 of the cost.

Maximize Your Tax Efficiencies for Energy

While the IRA specifies that rebates are accessible for projects commenced on or after August 16, 2022, it’s imperative for projects to satisfy all federal and state program criteria. The federal government has noted the challenge for states to provide rebates for projects finalized before their programs are fully operational. However, during this interim period, projects may be eligible for alternative federal tax incentives. 

Connect with CSH to explore the most tax-effective strategy for your energy efficiency.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

Guidance

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