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Bright Idea: Utility Rebates...Better to the Contractor or the Building Owner?

On energy efficiency retrofits projects, we are often asked by building owners and contractors whether it is preferable for the building owner to directly receive a utility rebate or have it go to the contractor, and then the contractor reduces its fee by the rebate amount.

 

Let’s use the following hypothetical involving a $100,000 lighting retrofit project and a $20,000 utility rebate. Typically, capital costs to improve a building, such as a lighting retrofit, are depreciated over 39 years. From a tax perspective, this offers little value to a building owner since the deductions are spread over such a lengthy period.

 

For Federal income tax purposes, utility rebates are treated as taxable income. As such, the best bet is usually to have the contractor take the rebate. From the contractor’s perspective, this is tax neutral as the contractor receives $100,000 of income under either alternative. However for the building owner, it avoids $20,000 of immediate income, which is not offset by the $20,000 of addition cost since the corresponding additional $20,000 deduction is spread over lengthy 39 years.

 

Best Bet: The Contractor takes the Utility Rebate

 

Of course, layering on the Federal tax incentives available for energy efficiency usually makes both alternatives more attractive.

 

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