For 2023, we installed an electric heat pump water heater. Received two rebates, one from local utility, which I understand I cannot deduct from the overall cost before determining the tax credit. The other was from the Bay Area Regional Energy Network, which is a coalition of nine county governments. From what I see on the IRS website, that one would not have to be deducted from the overall cost, as it is an incentive to “promote resource efficiency”.
From IRS website: State Energy-Efficiency Incentives. A state may provide incentives to encourage taxpayers to purchase property that also qualifies for an Energy Efficient Home Improvement Credit or the Residential Clean Energy Property Credit. Generally, a taxpayer is not required to reduce the purchase price or cost of property acquired with a governmental energy-efficiency incentive unless that incentive qualifies as a rebate under federal income tax law.
How do I know how the IRS would treat the BayREN "rebate"? Rebate or incentive.
The local utility is a rebate and is used to reduce the deductible amount. The other one sounds like an incentive which is not a return of what you spent but a credit and would not reduce the deductible amount.