Residential Energy Conservation Subsidy Exclusion (Personal)

Under Section 136 of the U.S. Code, energy conservation subsidies provided to customers by public utilities, either directly or indirectly, are exempt from taxation. This does not apply to electricity generation systems recognized as “qualifying facilities” under the Public Utility Regulatory Policies Act of 1978 (PURPA). Should a taxpayer receive federal tax credits or deductions for energy conservation property, they must decrease the investment basis for these claims by the amount of the energy conservation subsidy received; essentially, tax credits can’t be claimed for expenses not actually paid by the taxpayer.

“Energy conservation measure” refers to installations or modifications aimed at reducing electricity or natural gas consumption, or enhancing energy demand management. This applies to residential properties such as houses, apartments, condominiums, mobile homes, boats, and similar dwellings. In mixed-use buildings, the subsidy should be appropriately allocated between residential and other units.

While it’s implied that utility rebates for residential solar-thermal and photovoltaic (PV) systems might be non-taxable, the IRS has not provided a definitive ruling on this matter. Taxpayers planning to apply this provision to renewable energy systems should seek advice from a tax professional. Other types of utility subsidies, like credits or rate reductions, might also be non-taxable as per IRS Publication 525.

Note: “Public utility” is defined as any entity selling electricity or natural gas to customers for residential, commercial, or industrial use. This includes entities at the federal, state, and local government levels.