IRS issues guidance on tax treatment of energy efficiency rebates

The Inflation Reduction Act (IRA) established and expanded numerous incentives to encourage taxpayers to increase their use of renewable energy and adoption of a range of energy efficient improvements. In particular, the law includes funding for nearly $9 billion in home energy rebates.

While the rebates aren’t yet available, many states are expected to launch their programs in 2024. And the IRS recently released some critical guidance (Announcement 2024–19) on how it’ll treat the rebates for tax purposes.

The rebate programs

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, and

• $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.

The tax treatment

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.

Interplay with 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, and

• 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), and

• $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.

Act now?

While the IRA provides that the rebates are available for projects begun on or after August 16, 2022, projects must fulfill all federal and state program requirements. The federal government, however, has indicated that it’ll be difficult for states to offer rebates for projects completed before their programs are up and running. In the meantime, though, projects might qualify for other federal tax breaks. Contact us to determine the most tax-efficient approach to energy efficiency.

© 2024

Yes, Employers Can Still Claim the Employee Retention Credit Via an Amended Tax Return

According to the IRS, employers can still claim the employee retention credit (ERC) by filing amended employment tax returns, even though the coronavirus (COVID-19) pandemic-era tax credit aimed at helping employers and employees during the health crisis expired last year.

ERC begins. 

The ERC is a provision from the Coronavirus Aid, Relief, and Economic Security Act (CARES; P.L. 116-136) Act that allowed for a tax credit against certain employment taxes for eligible employers that paid qualified wages, including certain health plan expenses, to certain employees. This began on March 12, 2020 and was initially to end at the end of 2020 (see Payroll Guide ¶20,905 ).

ERC amended and extended. 

The ERC was extended until June 30, 2021 by the Consolidated Appropriations Act (CAA;  P.L. 116-260) and further extended through the end of 2021 by the American Rescue Plan Act of 2021 (ARPA;  P.L. 117-2).

Early ERC termination. 

However, the Infrastructure Investment and Jobs Act (Infrastructure Act;  P.L. 117-58) retroactively terminated the ERC for most employers, beginning on October 1, 2021. Recovery startup businesses were the only employers allowed to claim the credit through the end of 2021. A recovery startup business is any employer that began operations after February 15, 2020 subject to certain average annual gross receipts requirements.

Reporting and claiming the ERC. 

Generally, eligible employers claimed the ERC by reporting their total qualified wages and the related health insurance costs for each quarter on their  Forms 941 (Employer's Quarterly Federal Tax Return).

Revised employment tax forms. 

In order to account for COVID-19 tax credits like the ERC, the IRS had to revise Form 941 (and other forms in the 941 series) several times. The IRS also revised  Form 941-X (Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund).

Using a adjusted return to claim the ERC. 

The current version of the Form 941-X has multiple line numbers for making corrections and amendments regarding the ERC. These adjustments are reported on Form 941-X as follows: 

1.       Line 18a is for the nonrefundable portion of the ERC,

2.       Line 26a is for the refundable portion of the ERC,

3.       Line 30 is for the qualified wages of the ERC,

4.       Line 31a is for qualified health plan expenses for the ERC,

5.       Line 31b is a checkbox indicating if the employer is eligible for the ERC in the third or fourth quarter of 2021 solely because the employer is a recovery startup business, and

6.       Line 33a is for the qualified wages paid from March 13, 2020 through March 31, 2020 for the ERC. 

Worksheets for adjusting the ERC. 

There are also two worksheets in Form 941-X instructions that related to the ERC. Worksheet 2 is the adjusted ERC for wages paid after March 12, 2020 and before July 1, 2021. Worksheet 4 is the adjusted ERC for wages paid after June 30, 2021 and before January 1, 2022 (October 1, 2021 for most employers, except startup recovery businesses).

Period of limitations for amended employment tax returns. 

According to the Form 941-X instructions, employers may correct overreported taxes on a previously filed Form 941 if the Form 941-X is filed within three years of the date Form 941 was filed or two years from the date you paid the tax reported on Form 941, whichever is later.

The instructions also say that employers may correct underreported taxes on a previously filed Form 941 if the Form 941-X is filed three years of the date the Form 941 was filed.

The IRS refers to these time frames as a "period of limitations." And, for purposes of the period of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date.

Employers can still claim the ERC. 

Through an IRS media relations correspondence,  Thomson Reuters  has confirmed that employers can still claim the ERC, even if the employer never claimed the credit during the time period the ERC was available.

This is because the window of opportunity to amend employment tax overpayments has not yet expired with relation to the period of time the ERC was available. So, if an employer currently discovers that it was eligible for the ERC when the credit was available, the employer would file a Form 941-X to report the overpayment in employment taxes and ultimately claim the ERC after its termination date.

Qualifying credit tool still available.  Thomson Reuters  developed an Employee Retention Credit Eligiblity Tool that helps employers determine if they qualify for the employment tax credit. The Tool is free and is still active for employers to use and to see if they may qualify for this credit. 

 Reach out to your FMD Advisor to determine whether you qualify.