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.

Agri-Biodiesel

Agri-biodiesel is a special type of biodiesel derived solely from certain agricultural products including virgin vegetable oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds, rice bran, and mustard seeds, and from animal fats.

Certification

In order to claim the credit for biodiesel mixtures, you will need a certificate from the producer or importer, if you are claiming a credit for the use of biodiesel in your trade or business.  If you are producing the mixture yourself, and claiming the credit, you still need a certificate.  A standard format for this certificate can be found in the Appendix to Internal Revenue Service (IRS) Publication 378, Fuel Tax Credits and Refunds.  When completing the certificate, in addition to other information, you will be required to indicate a percentage breakdown of the fuel mixture between agri-biodiesel and other biodiesel.

How To Claim the Credit

If you produce or import an alcohol fuel mixture or biodiesel fuel mixture, the credit is first applied against any excise tax liability you report on Form 720, Quarterly Federal Excise Tax Return.  If the credit exceeds your liability, you can claim the excess as a credit on Schedule C of Form 720.  You can also claim a refund on Form 8849, Claim for Refund of Excise Taxes.  You can claim a credit on Form 4136, Credit for Federal Tax Paid on Fuels, or on Form 6478, Credit for Alcohol Used As Fuel.

If you blend alcohol with gasoline, diesel fuel, or kerosene outside the bulk transfer terminal system, you have to pay the gasoline tax on the volume of alcohol that goes into the mixture.  Likewise, if you blend biodiesel with undyed diesel fuel, you have to pay the diesel fuel tax on the volume of biodiesel that goes into the mixture. These taxes are reported and paid on Form 720.  If you are a blender of fuels, you also need to be registered with the Internal Revenue Service.  You register by completing and filing Form 637, Application for Registration (For Certain Excise Tax Activities).  Blenders of alcohol fuel mixtures and biodiesel fuel mixtures fall under Activity Letter M on that registration form.

Fuel Credits

In addition to the credits for fuel mixtures, you may also be able to take a credit if you sell or use alcohol or biodiesel directly as fuels and not in mixtures.

Alcohol Fuel Credit

You can claim a credit for straight alcohol used as a fuel  if you either used it in your trade or business or you sold it at retail and you placed it in the tank of the buyer’s vehicle, ensuring its use as a fuel.  You cannot claim the credit if you bought the alcohol at retail, even if the alcohol was used as a fuel in your trade or business.

The straight alcohol credit is calculated on Form 6478, Credit for Alcohol Used As Fuel, and the amount you can claim depends on whether the alcohol is 190 proof or greater, or from 150 proof to 190 proof.

Small Ethanol Producer

There is an additional alcohol fuel credit of 10 cents a gallon available to small ethanol producers.  You qualify for this credit if your annual production capacity is no more than 30 million gallons of any type of alcohol.  If you qualify, you can claim the credit on up to 15 million gallons of ethanol per tax year.

The small ethanol producer credit is also claimed on Form 6478.  This is the only form for claiming this credit, and all taxpayers, including individuals, corporations, partnerships and S corporations, all use this same form to claim the credit.  Partnerships and S corporations would then divide up the credit and pass it on to their partners or shareholders.

Biodiesel Fuel Credit

Just as in the case of the alcohol fuel credit, you can claim a credit for straight biodiesel used as a fuel if you either used it in your trade or business or sold it at retail and placed it in the buyer’s vehicle.  You cannot claim a credit if you bought the biodiesel, or agri-biodiesel at retail price.

The straight biodiesel fuel credit is taken on Form 8864, Biodiesel Fuel Credits.  This is the only form for claiming the credit, and all taxpayers including individuals, partnerships, corporations, and S corporations, must use it.

General Business Credit

Both the alcohol fuel credit and the biodiesel fuel credit are combined with other credits and taken as the General Business Credit on Form 3800.