U.S. tax law provides incentives for developing and using alternative sources of energy.  One of these incentives is a tax credit for alternative fuels.  There is a tax credit available for fuel mixtures in which gasoline or regular diesel fuel is blended with alcohol, biodiesel, or agri-biodiesel.  There is also a credit for using these alternative fuels directly, in their pure forms.

Fuel Mixtures

If you produce a qualified fuel mixture using alcohol or biodiesel, and you sell the mixture or use it in your trade or business, you may be able to take a tax credit.

There are two tax credits available for fuel mixtures:

• Credit for Alcohol Fuel Mixtures, and
• Credit for Biodiesel (Including Agri-biodiesel) Mixtures

The tax credit for alcohol fuel mixtures is 51 cents per gallon of ethanol (60 cents per gallon for alcohol other than ethanol).  The biodiesel credit is 50 cents per gallon of biodiesel ($1.00 per gallon if it is agri-biodiesel).

Alcohol Fuel Mixtures

Mixtures that qualify for this credit include alcohol mixed with gasoline, diesel fuel, or kerosene.  The mixture must be sold to another person to be used as a fuel, or used as a fuel in your own trade or business.  For purposes of this credit, alcohol includes ethanol and methanol, including methanol produced from methane gas formed in waste disposal sites.  It does not include alcohol produced from petroleum, natural gas, or coal.  You can only take into account the alcohol you use to produce the mixture when it is sold or used in your trade or business.

Biodiesel Mixtures

A qualified biodiesel mixture is a mixture of biodiesel with diesel fuel, without regard to kerosene.  You can take a credit only for a biodiesel mixture that you produce; not one that you purchase for resale or use.  You must either sell the mixture to another person for use as a fuel, or use it as a fuel yourself, in your own trade or business.  As in the case with alcohol mixtures, you can only take into account the biodiesel used to produce a mixture that is sold or used in your trade or business.

Biodiesel, as defined for tax purposes, consists of the “monoalkyl esters of long chain fatty acids”.   These esters come from plant and animal matter.  The bioidiesel produced from them must meet the registration requirements of the Environmental Protection Agency for fuels and fuel additives, in accordance with the Clean Air Act.  And the biodiesel must also meet the requirements of the American Society of Testing and Materials D6751.