The Inflation Reduction Act (IRA) expanded several existing tax incentives — and created some new ones — for homeowners who “go green.” Among the new incentives are two IRA-funded Department of Energy (DOE) programs that provide rebates to homeowners who invest in certain energy-efficient home improvement and electrification projects.

When the IRA was enacted, there was some uncertainty over how these rebates would be treated for federal income tax purposes. Fortunately, the IRS has provided some answers. In Announcement 2024-19, the IRS clarified that homeowners who receive rebates aren’t required to include them in their gross income. However, they must reduce their cost basis in the property by the amount of the rebate. The IRS also explains how rebates affect the calculation of the energy-efficient home improvement credit.

What it means for homeowners

According to the IRS, home-energy rebates are treated as purchase price adjustments and, therefore, are excluded from gross income for federal tax purposes. However, that means the amount of the rebate isn’t included in the purchaser’s cost basis. A reduction in basis can potentially increase a homeowner’s taxable gain when the home is sold.

Suppose, for example, that a homeowner purchases eligible energy-efficient property with a pre-rebate price of $600 and receives a point-of-sale rebate of $500. The rebate is nontaxable, but the homeowner’s cost basis in the property is only $100.

What happens if the homeowner purchased the property earlier for $600 but later receives a $500 rebate? In that case, the homeowner also has to reduce his or her basis in the property from $600 to $100.

Note that rebate payments treated as purchase price adjustments aren’t subject to IRS information-reporting requirements (under which payors of amounts over $600 must file information returns with the IRS and furnish statements to the payee). So, the entity paying the rebate (a state or local government, for example) isn’t required to report the payment on Form 1099, even if it’s more than $600.

What it means for businesses

Sometimes rebates are paid directly to a business in connection with its sale of goods or provision of services to a purchaser. For example, a contractor may receive a rebate on energy-efficient property that it purchased for a residential remodeling project.

These rebate payments are includible in the business’s gross income. They also may be subject to information reporting.

Coordination with the energy-efficient home improvement credit

This tax credit, available under Internal Revenue Code Section 25C, had expired but was revived and expanded by the IRA. It allows homeowners to claim a credit of up to 30% of the cost of qualifying energy-efficiency improvements, residential energy property and home energy audits, subject to certain limits.

The IRS announcement clarifies that homeowners who receive rebates under one of the DOE programs and claim the Sec. 25C credit must reduce the amount of qualified expenditures used to calculate the credit by the amount of rebates they receive. The announcement provides an example: If a homeowner purchases an eligible product for $400 and receives a $100 rebate through one of the DOE programs, the homeowner may claim a 30% credit with respect to the remaining $300 of qualifying expenditures. In other words, the Sec. 25C credit would be reduced from $120 to $90.

Rebates coming soon

As of this writing, rebates aren’t yet widely available. However, many rebate programs are expected to be launched in 2024. Be sure to monitor developments in your state.

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