Are Turf Rebates Taxable?

The Los Angeles Times has an article asking this question. Because of the drought in California, the Metropolitan Water District had a $340 million incentive program so that homeowners would replace grass (which takes a lot of water) with bark, rocks, and other drought tolerant (xeriscape) landscapes. (The Southern Nevada Water Authority has a similar program.) The MWD has no idea if they have to issue 1099s to rebate recipients under federal law. (It is exempt from California taxation, though.) The article notes that the MWD suggests talking to a tax professional, so I’ll helpfully give an answer.

Any accession to wealth is taxable unless Congress has exempted that from taxation. One such exception are rebates on purchases. If you buy, say, a new car for $25,000 and receive a $1,000 rebate, you really bought the car for $24,000. A car rebate isn’t taxable income. Is the MWD (or SNWA) program a rebate?

No, it’s not. There’s nothing being purchased from the water agency. Instead, you’re tearing out grass, and replacing it with something else. The agency paying the “rebate” isn’t the same agency that’s doing the work. You might do it yourself, or you might higher a landscaping firm to do the work. The landscaping firm isn’t giving you a rebate.

If this isn’t a rebate (for tax purposes), then what is it? Well, the IRS could rule it’s not taxable since it is a lowering of the cost of doing the grass replacement and this is good for the environment. However, that’s not likely. There’s nothing in the Tax Code that says if something is done that’s good for the environment it’s not taxable. Instead, this looks like income–“Other Income” that would be reported on line 21 of Form 1040. You’re receiving a reward (income) for doing something. It’s not a rebate of a purchase. It’s not exempt from taxation under any other of the exemptions under the Tax Code. Thus, it’s taxable income.

23 Responses to “Are Turf Rebates Taxable?”

    • Double taxation at its best says:

      So let me analyze this, I have lawn replaced and pay contractor for the work.
      The government taxes me as income (really?) and then taxes the contractor ?

      How did I get extra income when I had to pay for the replacement?

  1. JohnH says:

    My first reaction was that the rebate would be nontaxable under IRC Sec 136, but that section only applies to electricity and natural gas conservation (direct or indirect) rebates. Perhaps it is time for Congress to expand the law to include water conservation.

  2. […] post deals with a very different kind of turf monster. Back in September I wrote about Southern California’s Metropolitan Water District issuing &#82…. It’s clear that such “rebates” are taxable for federal tax purposes. (California […]

  3. Robert says:

    Water is a freely acquired resource for the metropolitan water district through rain, snow melt, wells and ground based aquifers. The real costs are the energy to extract, pump and transport the water. Therefore, these rebates are actually energy savings and would fall under the IRS publication 525 where it states:

    “Energy conservation subsidies. You can exclude from gross income any subsidy provided, either directly or indirectly, by public utilities for the purchase or installation of an energy conservation measure for a dwelling unit.

    Energy conservation measure. This includes installations or modifications that are primarily designed to reduce consumption of electricity or natural gas, or improve the management of energy demand.”

    The removal of the grass clearly improves the management of energy demand.

  4. kenny says:

    I was told by my water district the feds were going to address whether “cash for grass” rebates are taxable in January 2016. Anyone heard of such, and any update?

    • Tim says:

      I received a 1099 to be completed and returned so the Feds can tax me 1-15-16.

      • joh says:

        Just filed taxes…. I thought i would end up paying around 10% on tax on my turf rebate and turns out it has a 20% tax to it….. Did u get charge with same percentage?

        • Betsy says:

          the actual % of tax depends on individuals tax bracket – it is considered “other income” and would be taxed at whatever rate/bracket you are in 🙁

  5. Barbara Magnuson says:

    I am horrified to learn that the rebates for installing drought-resistant lawns IS INDEED TAXABLE.

  6. Kenneth Mask says:

    It does appear the rebate is taxable. Since getting rebate requires that I replace turf with other materials needing no or little irrigation could an argument be made that the cost of turn replacement would be subtracted from the total rebate, thus reducing the tax liability?

    • elaine mcelderry says:

      you can’t deduct the cost from the rebate. the issue is that if you had spent money to
      landscape your yard it would not be a deductible expense. No upkeep on your house is deductible. The IRS views you spending money to landscape and then getting money from the DWP as separate events. They would tax you if you got the money to do the landscaping from a second job.
      The really unfair issue is the DWP acting like maybe it wouldn’t be taxable since it is not taxable for Calif Taxes. Other rebates programs around the country are very clear that it is taxable.

  7. Jerry Trent says:

    Nice to be told about the IRS tax after the work has been done. Sounds like the MWP knew something about it all along, but didn’t let anyone know.
    Isn’t this my tax money?
    The federal government wants the states to be self sufficient, until there is a possibility of taking more money from us.
    Very disappointed, again, 48 year resident Studio City senior.
    It never stops.

  8. Trae Daniel says:

    The Desert Water Agency in Palm Springs did NOT disclaim that the rebate would be considered taxable income. I have the documents to prove it. I participated in the program, received my rebate of $3,000 and then was told months later that I was being issued a 1099. Had I had all the information I would not have participated. I intend to go to Small Claims Court to sue the DWA for consumer fraud and recover what ever Federal income tax I must may because of their negligence.

    • steven says:

      I asked specifically if it were taxable before I started the program, and I was told it is absolutely not taxable for federal or state. Wish I got it in writing. Please update us on your small claims court case.

    • mp says:

      good luck with that – there was neither fraud nor negligence. Frankly, California can’t advise you on whether something is taxable for federal tax purposes. Moreover, good look overcoming state sovereign immunity. At the end of the day, you have zero change of recovering any federal tax that is due.

      I do agree that it is a shame that this issue wasn’t resolved, but, unfortunately, I don’t see any legal recourse. Plus, you have the option of not including the 1099 income and then challenging any tax deficiency assessed against you in Tax Court.

  9. John says:

    This has even deeper implications. We received a rebate of $10,00.00. We reported to Covered California what we thought our income for 2015 would be and received the Premium Tax Credit to make up the difference for our healthcare plan. Now, if we under reported our projected income due to not being aware that we would have to report that rebate as income, we will be on the hook for repaying a sizable chunk of the Premium Tax Credit.and the tax on $10,000 which would also put us in a different tax bracket requiring a higher tax liability. UNBELIEVABLE!

    • Ted Levy says:

      Hey, John, I do agree that your situation is a tough double whammy to endure. Sorry to hear about it.

  10. […] am getting lots of comments in regards to the two posts I wrote about turf rebates. And several correspondents are blaming me for the fact that the money they received is […]

  11. joe rosen says:

    Receiving a Form 1099 from the water district does not mean that the rebate is or is not taxable by the IRS as some have claimed. The LADWP, administered by SoCal Water$smart letter accompanying the Form 1099 reads “There are ongoing efforts to address the taxability of water conservation rebates, such as rebates for turf removal, at the federal level” “We are obligated to process 1099 forms for all rebate program participants who received $600 or more in rebate funds during calendar year 2015.

    The rebate is NOT taxable to California purposes. it would be nice if the IRS and water districts could resolve the issue as it is creating great uncertainty.

    At present, one has three choices:

    1. Include the amount as “other Income” and if the IRS or the Federal tax court eventually rules to the contrary, file an amended return for a refund. Check with your tax adviser as to potential statute of limitation issues.

    2. Do not include the amount of income and if you are audited or otherwise asked for money (and perhaps penalties and interest), pay the amount or take it to Federal Tax Court.

    3. File for an extension (through September) and hope that the matter is settled by then. Of course, you still need to pay the tax with the extension to avoid penalty and interest but if it is settled as non taxable, you will get a refund when you file on the extension.

    My gut is that it will be taxable for Federal purposes–another way to raise taxes When I practiced, I use to tell clients when they said “that is not fair”, that nobody ever said the IRC was fair but that is the law. I got a rebate and anticipate paying tax on it. Too bad some of the large corporations who literally got hundreds of thousands of dollars in turf removal rebates (for example in Warner Center, Woodland Hills) under the original plan that did not limit the amount of rebate is not fighting this through their Federal senators and Congress persons as they have the political clout to do something.

  12. Mimi says:

    I’m with Robert. I looked up IRS Publication 525 (page 30) and it’s pretty clear to me.

  13. Larry says:

    I would argue that the rebate is not taxable on a variety of grounds. First, the rebate is coming from a public utility for energy conservation purposes. Second, it would follow a similar concept to a cash rebate on purchases. The rebate is not taxable, but the basis would decrease by the amount of the rebate. Therefore, if the turf cost $10,000 and you received a rebate of $2,000, the adjusted basis for the turf would be $8,000. If you sell your home, your adjusted basis would be the $8,000 for the turf improvement.
    I could see this going to tax court some day since “water” is not specified. It is the water utility that is providing the incentive rebate, and conservation utility rebates are exempt from taxation. Also, one has to purchase a product in order to qualify for the rebate which follows under the prior reason. I think there is a sufficient argument to justify not including it in income.
    My suggestion in this semi-gray area is to talk to your client. Some are completely risk adverse, and just want to include it in income. They would pay taxes on the dollar they found on the ground in fear that the IRS would audit them. Others are not so gun-shy, and they would be willing to fight the matter. In that case, include the amount as other income, then include a negative amount for other income in the same area with an explanation note. It’s not the cleanest or precise way of reporting this, but it can solve the issue for these clients. This way, the income is reported, but then deducted on the return so as not to increase AGI. As a rule of thumb, whenever there is a government document issued (W-2, 1099, etc.), report it. That does not mean it is taxable. It just means it needs to be reported.
    On an aside, a company issued a 1099 to a client last year for non-taxable legal settlement. The court documents specifically specified the nature of the proceeds which were for medical expenses and non-taxable pain and suffering. However, whether due to ignorance or spite, they losing litigant issued a 1099. So, the income was reported, then deducted accordingly, and a copy of the court documents were provided to the IRS and state to explain why, along with a notation and citation.
    I really think that the court would be on the side of the taxpayer unless Congress specifically adds to the law that such rebates are taxable.