This might be a little outside the wheelhouse of what your site covers, but I figured I’d give it a shot anyway.
I’m writing a story about people who get rebates for solar (or other energy-saving) home improvements, then find out that those rebates have been classified as taxable income by the agencies operating the programs.
Any idea why this takes place? What’s the financial incentive for energy utilities/agencies to classify the rebates this way?
Thanks very much for any insight you can share,
Dan from SolarPowerRocks!
Good question you asked regarding taxation and solar rebates.
Big first note, we are not tax professionals, are not credentialed to give tax advice! Tax advisors are much better to consult with the nitty gritty, but here’s what we know:
Long and short of the matter- taxation depends where the money is coming from for the incentive, and if the incentive is officially labeled as a subsidy or a rebate.
Incentive programs can be designed to avoid any possibility that they are subject to federal tax.
The results of digging into tax law and questioning the IRS suggest that residential incentives (rebates, grants) may not be taxable under certain conditions.
In contrast, businesses may actually have a greater overall tax advantage by claiming incentives as taxable income.
The bottom line is that solar purchasers should be advised not to assume that their incentive is taxable just because they receive a 1099-G documenting the incentive amount. However, that the tax code is clear that state tax credits are considered taxable income for federal tax purposes.
These credits are basically state taxes that an individual or business did not have to pay, and therefore, remain part of gross income for federal tax purposes. There is no financial incentive for utilities to classify rebates as “taxable”, any payments going directly to you is simply taxable income.
State incentive programs that provide a taxable grant or other type of subsidy are required to inform recipients that the incentive is taxable. However, the tax code is unclear as to whether or not state government incentives are taxable. It may be argued that these incentives are nontaxable for residential customers.
There is strong evidence that utility rebates for residential solar projects are nontaxable. According to Section 136 of the IRS Code, energy conservation subsidies provided by public utilities, either directly or indirectly, are nontaxable:
Energy conservation subsidies. You can exclude from gross income any subsidy provided, either directly or indirectly, by public utilities for the purchase or installation of an energy conservation measure for a dwelling unit.
Energy conservation measure. This includes installations or modifications that are primarily designed to reduce consumption of electricity or natural gas, or improve the management of energy demand.
Dwelling unit. This includes a house, apartment, condominium, mobile home, boat, or similar property. If a building or structure contains both dwelling and other units, any subsidy must be properly allocated.
Solar does fit the description as an energy conservation measure.
Some states have designed their programs to avoid the tax issue. For example, The Sustainable Development Fund in Pennsylvania designed a PV grant program to avoid taxation of the up-front portion of the incentive for the system owner by having the approved contractor receive the incentive and take it off the bottom-line cost to the consumer.
Oregon’s PV buydown is similarly structured. This mechanism avoids direct government payments to consumers.
If the payment is termed a “rebate” again but coming from a manufacturer or supplier (instead of the state as a subsidy), you could easily point to IRS code and argue it isn’t subject to tax (Direct from IRS publication 525):
Cash rebates. A cash rebate you receive from a dealer or manufacturer of an item you buy is not income, but you must reduce your basis by the amount of the rebate.
Example. You buy a new car for $24,000 cash and receive a $2,000 rebate check from the manufacturer. The $2,000 is not income to you. Your basis in the car is $22,000. This is the basis on which you figure gain or loss if you sell the car and depreciation if you use it for business.
Hope that helps you understand this messy, complicated matter that solar advocates would like ironed out so as not to dismay any early adopters.
Thanks for your question,
Last modified: May 21, 2020