You must be cautious when analyzing the financial impact of California or local agency “rebate” programs, or incentives. In some cases, these measures can actually translate to additional taxable earnings from the perspective of the IRS.
One recent example cited in the LA Times was the rebate offered by a Metropolitan Water District to replace water consuming grass with other materials. While California provides a state tax exemption for rebates and other programs such as these, the IRS considers the rebate to be income. What starts out as a $5,000 rebate to replace sod may actually become a $1,500 tax bill to the IRS.
You need to ensure that these incentives are properly classified as income on your federal tax return or you may be contacted by the IRS for an audit. It is important to carefully consider all aspects of a transaction to ensure that you receive the financial benefit you anticipate.
