Do you have to pay tax on the Turf Replacement Program rebate that is put on by Highlands Ranch Water? The answer is likely yes. Read on below to learn why, and how a CPA can help you report this income correctly.

Residential real estate owners in Highlands Ranch currently have the ability to be reimbursed by Highlands Ranch Water for a portion of the costs to convert their turf to more water friendly landscapes, such as a “ColoradoScape” or low-water use turf of $2.50 per square foot and $1.50 per square foot, respectively. A rebate for up to 2,000 square feet is available for the removal of any high-water-use plant material, but the exact amount is dependent on replacement material. This equates to a potential maximum rebate of $5,000 for ColoradoScape, and $3,000 for low-water use turf. There are similar rebate programs in other Denver metro areas such as Denver, Thornton, Lakewood, Westminster, Lafayette, Wheat Ride, and others.

So, assuming you get a ColoradoScape or a low-water use turf rebate from Highlands Ranch Water, how does the IRS view this? The bad news is that Highlands Ranch Water will send you a tax form called a 1099-Miscellaneous for any rebate payments above $600. This means the IRS will be looking for you to report this income, and if you conveniently “forget” to report it, you will almost certainly receive a letter from the IRS assessing additional tax (with interest and penalties). For reasons discussed below, even if you receive less than $600 in the form of rebates, you should still technically report that amount, however Highlands Ranch Water may not send you a 1099 tax form.

Now why do you have to pay tax on this rebate; is it right for Highlands Ranch Water or other organizations to send you a 1099 tax form for the rebate amount? We can find an answer in a supreme court case from 1955 called Commissioner v. Glenshaw Glass Co (Glenshaw Glass).

Glenshaw Glass is one of the most important Supreme Court tax cases because it explains, in simple terms, what counts as taxable income under federal law. The Court said that income is not limited to wages, business profits, or investment returns. Instead, it includes any clear increase in wealth that a person or company actually receives and controls, unless the tax law specifically excludes it. In that case, the taxpayers received punitive damages in lawsuits and argued that those amounts should not be taxed. The Supreme Court disagreed and held that the payments were taxable because they made the taxpayers richer, the money had actually been received, and the taxpayers had full control over it. The case is still widely cited because it established the modern idea that gross income under Internal Revenue Code § 61 is meant to be very broad and generally reaches all economic gains unless Congress has created a specific exception.

In other words, as one of my tax professors explained during my graduate tax program “If you go to bed richer than when you woke up, you have taxable income” or something to that effect, anyway.

So now that we have established the basis for receiving a 1099 tax form for your rebate from xeriscaping, the next step is making sure you report the amount correctly.

If you are unsure how to report this income, a CPA, enrolled agent or tax professional can help you. In addition to income tax, depending on how you enter the 1099 tax form, the tax software you are using could assess an additional ~15.3% self-employment tax on the amount. It is very important to make sure this does not apply, only the regular income tax, or else you will be giving the IRS a tip they do not deserve.