California treatment of federal-TAXABLE heat pump rebate

[rkrkrkCA]

My city in California gave us a rebate for purchasing a heat pump in 2023.  Apparently, according to the IRS, that rebate is taxable because it was paid by the city, NOT the utility (which would not be taxable).  We received a 1099 form showing the amount of the rebate.  

I can't find any information about whether the state of California also taxes this, or if it I can subtract it as an adjustment.  No guesses, please, but if you know the answer and can back it up with a reference, appreciate it.

[maglib]

@rkrkrkCA 

EDITED MY RESPONSE.  CORRECTED BELOW:

IRS requires a 1099 for all amounts over $600.

:

Taxpayers will make purchases, as a result of those purchases, will be entitled to receive rebates…. The portion of the  purchases that taxpayers can…receive back in cash…does not constitute gross income to taxpayers. It is instead considered a reduction in the cost of the heat pump.  Any energy credits being taken, you would reduce your cost of the item by the rebates received.

When entering the 1099 misc  indicate that it is "Green Energy rebate for heat pump, IRS considers a Reduction of cost"   Continue and say it is not related to your job. say no it did not involve an intent to earn money.   

Then  you will enter less common income 1099 misc again and make an adjustment for it:

During entry for the 1099misc

1. go to the federal income section
2. scroll to the bottom
3. Miscellaneous Income, 1099-A, 1099-C, Start
4. Scroll to the bottom
5. Other reportable income, Start
6. Other taxable income?
7. Select YES
8. Description IRS considers rebates as reductions of cost
9. Amount, enter your amount as a negative
10. continue

Did you know: High-efficiency heat pumps and mini splits are eligible for a federal tax credit up to $2,000.https://www.irs.gov/pub/taxpros/fs-2022-40.pdf  Would be under the Home Energy Tax Credit section of TT.

[rkrkrkCA]

Thank you for the suggestion.  I will look for it.

Yes, I know about the federal tax credit, and we are taking that of course.

[rkrkrkCA]

Can you please provide your authoritative source for that statement that "California DOES NOT tax this"?

[maglib]

see my edited response. I looked further into how the IRS classifies rebates.

[rkrkrkCA]

I think it may come down to the definition of "rebate"  and in particular, "Green Energy Rebate" that you reference.  I believe that refers to the "instant" rebates that are supposed to be part of the Inflation Reduction Act for low-to-moderate income households (but as far as I know, aren't yet active, at least in California), separate from the tax credits that are not income-based.  Those rebates happen at purchase, so are considered a reduction in purchase price, as you note.  In my case, the city wanted to incentivize installation of heat pumps, so offered residents a monetary "rebate" to do so, from city funds.  It seems this isn't really considered a rebate by the IRS: several months after getting our money, the city sent this communication (along with a request for a W2): "Our finance department recently discovered that all rebates over $600 are considered taxable income by the IRS."  

So I'm pretty sure that at least for now, the IRS considers this taxable income.  I'm just wondering/hoping that the state sees it differently!

[maglib]

@rkrkrkCA So far the IRS has allowed all green energy rebates to not be taxable income and all middle class rebates.  The IRS historically has not taxed green energy nor have they taxed any middle class incentive rebates nor any other similar community incentive rebates.  The requirement of a 1099 is just that any amounts over $600 require it.  Based on history of IRS treatments and historical determination letters this would not be considered income.  Even cc rebates if applied to specific purchases are not rebates, only those that are given for total purchases.

WASHINGTON — The Department of Treasury and the Internal Revenue Service today issued Announcement 2024-19PDF that addresses the federal income tax treatment of amounts paid for the purchase of energy efficient property and improvements.

Generally, taxpayers who receive rebates for the purchase of energy efficient homes will not include the value of those rebates as income on their tax returns, however they will need to reduce the basis of the property when they sell it by the amount of the rebate.

The Inflation Reduction Act (IRA) statutory language describes performance-based incentives and electrification product subsidies as “rebates.”  IRS even issued a determination letter which is not law but, can be relied upon:

Announcement 2024-19 provides that amounts received from the Department of Energy (DOE) home energy rebate programs funded through the IRA will be treated as a reduction in the purchase price or cost of property for eligible upgrades and projects. Accordingly, the consumer that receives an IRA rebate will not be required to report the value of the rebate as income.

Additional information about energy-related tax benefits under the Inflation Reduction Act, such as energy efficient homes, can be found on IRS.gov.

Another one:

https://www.irs.gov/pub/irs-drop/rp-23-27.pdf

https://www.irs.gov/pub/irs-drop/n-24-30.pdf

The IRS has consistently not required taxation of any rebates for green energy nor any rebates for betterment of society.  

[rkrkrkCA]

I did see that announcement yesterday of the decision from the IRS, but if you read it closely, it applies only to Dept of Energy rebates (i.e., the IRA rebate program, which was awaiting this guidance) - which mine isn't. In fact, all of the links you offered refer specifically to the IRA and don't mention any other rebate program.

I suppose I can take a chance based on their prior decisions and just pay up if they challenge my reasoning! Thanks for your follow-up.

[maglib]

@rkrkrkCA  The point is the IRS does not make specific rules for everything and determination letters are guidelines on what their opinions and compliance are. Determination letters are not rules but, show you how the IRS will likely decide all future cases and can normally be relied upon.  CA follows IRS unless otherwise ruled.  ALL IRS opinions and determinations have said that rebates are reductions in prices or any green energy or relief aid are not normally taxed.

[maglib]

@rkrkrkCA 

I found this today. 

https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-tax-treatment-of-amounts-paid-as-reb...

"

IR-2024-97, April 5, 2024

WASHINGTON — The Department of Treasury and the Internal Revenue Service today issued Announcement 2024-19PDF that addresses the federal income tax treatment of amounts paid for the purchase of energy efficient property and improvements.

Generally, taxpayers who receive rebates for the purchase of energy efficient homes will not include the value of those rebates as income on their tax returns, however they will need to reduce the basis of the property when they sell it by the amount of the rebate.

The Inflation Reduction Act (IRA) statutory language describes performance-based incentives and electrification product subsidies as “rebates.”

Announcement 2024-19 provides that amounts received from the Department of Energy (DOE) home energy rebate programs funded through the IRA will be treated as a reduction in the purchase price or cost of property for eligible upgrades and projects. Accordingly, the consumer that receives an IRA rebate will not be required to report the value of the rebate as income.

Additional information about energy-related tax benefits under the Inflation Reduction Act, such as energy efficient homes, can be found on IRS.gov."