I am providing energy efficient lighting to my commercial customers. ComEd has incentives (*rebates) for the customers who install energy efficient lighting. Comed requires a W-9 for each rebate application and they will send out a 1099 for rebates over $600. The customers are asking what the tax effect that the rebate will have on their businesses.

One example: Material cost $10,000
Labor cost 3,000
ComEd rebate 5,000
Tax rate 30%

2nd example
Material cost $10,000
Labor cost 3,000
ComEd rebate 10,000
Tax rate 30%

Please help me explain how this will effect my customers'/prospects' taxes.

ANSWER

The BIDaWIZ Team's Answer:

This means that the amount of the rebate is taxable income to the client and that the 30% tax credit calculation is applied on the total cost. If the rebate was not taxable, then the tax credit calculation would be reduced by the rebate amount. See the below examples. You'll notice that option one, while a lower rebate, is more tax friendly as the rebate tax is lower.

1) Taxable Rebate: $5,000
Tax Credit Calc: $13,000 * 30% = $3,900
2) Taxable Rebate: $10,000
Tax Credit Calc: $13,000 * 30% = $3,900

References: Internal Revenue Code Section 136(b); IRS Publication 542
State: Illinois