Residential Energy Conservation Subsidy Exclusion (Corporate)

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 exemption does not extend to electricity-generating systems recognized as “qualifying facilities” under the Public Utility Regulatory Policies Act of 1978 (PURPA). If a taxpayer receives federal tax credits or deductions for energy conservation property, the cost basis for these tax benefits must be reduced by the amount of the energy conservation subsidy. In other words, taxpayers cannot claim a tax credit for expenses that were not actually incurred by them.

The concept of “energy conservation measure” covers installations or modifications aimed at reducing electricity or natural gas consumption, or enhancing energy demand management. This includes residential properties such as houses, apartments, condominiums, mobile homes, boats, and similar dwellings. In mixed-use buildings, any received subsidy must be appropriately allocated between residential and other units.

While it’s implied that utility rebates for residential solar-thermal systems and photovoltaic (PV) systems might be exempt from tax, the IRS has yet to provide a definitive ruling on this matter. Therefore, taxpayers planning to utilize this provision for renewable energy systems should seek advice from a tax professional. Other forms of utility subsidies, which could be in the form of credits or rate reductions, may also be non-taxable as per IRS Publication 525.