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Federal Tax Incentives: 
Biodiesel Fuel Credit § 40A

Background 

 

The Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as part of the Further Consolidated Appropriations Act, 2020 (Pub. L. No. 116-94), retroactively extended certain biodiesel fuel tax benefits. Specifically, the IRC § 40A biodiesel and renewable diesel fuels credit was extended for fuel sold or used in calendar years 2018 through 2022. Excise tax credits for biodiesel mixtures under IRC § 6426(c) were extended through December 31, 2022, while credits for alternative fuels under IRC § 6426(d) and payments under IRC § 6427(e) were extended through December 31, 2020. See IRC § 40A(g).

 

Section 13201 of the Inflation Reduction Act of 2022 (IRA), Pub. L. No. 117-169 (Aug. 16, 2022), amended IRC § 40A to extend the biodiesel and renewable diesel fuels credit through December 31, 2024. The IRA also extended the $1.00 per gallon biodiesel mixture excise tax credit under IRC § 6426(c) through December 31, 2024. A pending bill—H.R.9060 (Biodiesel Tax Credit Extension Act of 2024)—proposes to extend this through 2025. ​

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Fuel Definitions

The Biodiesel Fuels Credit under IRC § 40A(a) is a general business credit under IRC § 38 and includes both income and excise tax incentives. It comprises three distinct components: (1) the biodiesel mixture credit, (2) the biodiesel credit, and (3) the small agri-biodiesel producer credit.

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  • (1) IRC § 40A(a)(1) — the Biodiesel Mixture (Renewable Diesel Mixture) Credit (commonly referred to as the "blender credit")

    • This credit equals $1.00 per gallon of biodiesel used to produce a qualified mixture with petroleum diesel fuel. The mixture must be sold or used by the producer in a trade or business during the taxable year. Casual off-farm production is not eligible.

  • (2) IRC § 40A(a)(2) — the Biodiesel (Renewable Diesel) Credit (also known as the "producer credit")

    • This credit is $1.00 per gallon of biodiesel or renewable diesel that is not part of a mixture and is either used by the taxpayer in a trade or business or sold at retail and placed directly into the purchaser’s fuel tank.

  • (3) IRC § 40A(a)(3) — the Small Agri-Biodiesel Producer Credit (also known as the "small producer credit") in the case of an eligible small agri-biodiesel producer. 

    • This credit provides an additional $0.10 per gallon for up to 15 million gallons of agri-biodiesel produced by an eligible small producer (defined as having annual productive capacity not exceeding 60 million gallons).

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In general, the eligible tax credits derived under IRC § 40A consist of the following types of fuels:

  • Biodiesel: a renewable fuel made from vegetable oils, animal fats, or recycled cooking oils that meets EPA registration requirements and ASTM D6751 standards.

  • Renewable biodiesel: a liquid fuel derived from biomass that meets EPA registration and ASTM D975 or D396 specifications. It does not include fuel derived from co-processing biomass with non-biomass feedstocks.

  • Agri-biodiesel: biodiesel produced solely from virgin oils (e.g., soybeans, corn, sunflower seeds, cottonseeds, canola, rapeseed, flaxseed, camelina) or animal fats.

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Overlapping Incentives Limitation: Taxpayers may not claim multiple credits for the same gallon of fuel. Biodiesel or renewable diesel eligible for credits under IRC § 40A or § 40B (Sustainable Aviation Fuel Credit) cannot also qualify for the Alternative Fuel or Alternative Fuel Mixture credits under IRC §§ 6426(d)-(e) or 6427(e). Similarly, fuel qualifying for the IRC § 40 Second Generation Biofuel Producer Credit is excluded from IRC § 40A and § 6426 credits.​

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Biodiesel (Renewable Diesel Mixture) Mixture Credit

To qualify for the IRC § 40A(a)(1) Biodiesel Mixture Credit, the taxpayer must produce a qualified mixture by combining biodiesel or renewable diesel with petroleum diesel fuel. The mixture must be used or sold by the producer in a trade or business during the taxable year. Kerosene is disregarded for mixture qualification, except when calculating renewable diesel mixture credits for aviation fuel, where kerosene is treated as diesel fuel.

 

The credit is available only to the producer of the mixture and must be claimed in the taxable year the mixture is sold or used in a trade or business. Casual off-farm production does not qualify. See IRC § 40A(b)(1)(C) and (D).

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Note: If biodiesel or renewable diesel is used to produce blended taxable fuel outside the bulk transfer terminal system, and the resulting mixture is diesel fuel, the producer may be liable for a 24.4 cents per gallon excise tax under IRC § 4081(a)(2)(A)(iii). Report this liability on Form 720, Quarterly Federal Excise Tax Return on the line for IRS No. 60(c) for the applicable quarter.

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A registered biodiesel blender may claim a $1.00 per gallon credit for producing a qualified mixture containing at least 0.1% petroleum diesel. The credit must first be applied against the blender’s excise tax liability. Any excess credit may be refundable under IRC § 6427(e), subject to IRS registration and certification requirements.

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Claims must include a certificate from the registered biodiesel producer or importer that:

  • identifies the product;

  • specifies the product's biodiesel, agri-biodiesel, and/or renewable diesel content;

  • confirms the product is properly registered as a fuel with the U.S. Environmental Protection Agency (EPA); and

  • confirms the product meets the requirements of American Society of Testing and Materials (ASTM) specification D6751 or or D975/D396 (for renewable diesel). See IRS Notice 2005-62.​

 

Renewable diesel is defined as liquid fuel derived from biomass that meets EPA's fuel registration requirements and ASTM specifications D975 or D396. The definition of renewable diesel does not include any fuel derived from co-processing biomass with a feedstock that is not biomass. 

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Biodiesel (Renewable Diesel) Credit

A taxpayer that delivers pure, unblended biodiesel (B100) or renewable diesel into the fuel tank of a vehicle, or uses it as on-road fuel in a trade or business, may be eligible for a $1.00 per gallon income tax credit under IRC § 40A(a)(2).

 

Renewable diesel is defined as a liquid fuel derived entirely from biomass that meets EPA registration requirements and ASTM D975 or D396 specifications. Fuel produced by co-processing biomass with non-biomass feedstocks does not qualify.

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The credit applies only to unblended biodiesel or renewable diesel. If sold at retail, only the seller who places the fuel directly into the purchaser’s tank may claim the credit. See IRC § 40A(b)(2)(B). The credit is claimed against the taxpayer’s income tax liability.​ In general, the IRC § 40A(a)(2) credit applies to biodiesel or renewable diesel that is used by the taxpayer in a trade or business or sold at retail and placed into a vehicle’s fuel tank. No credit is allowed for fuel purchased at retail and subsequently used in a trade or business.

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Pursuant to IRC § 40A(b)(3), biodiesel (renewable diesel) credit claims must generally include a copy of the certificate from the registered biodiesel producer or importer that:

  • identifies the product;

  • specifies the product's biodiesel, agri-biodiesel, or renewable diesel content;

  • confirms the product is properly registered as a fuel with the U.S. Environmental Protection Agency (EPA); and

  • confirms the product meets the requirements of American Society of Testing and Materials (ASTM) specification D6751.

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Note: If biodiesel or renewable diesel is sold or used in a diesel-powered highway vehicle or train, the taxpayer may be liable for a 24.4 cents per gallon excise tax under IRC § 4081(a)(2)(A)(iii). Report this liability on Form 720 on the line for IRS No. 79 for the quarter in which the biodiesel was sold or used, or IRS No. 60(b) for the quarter in which the renewable diesel was sold or used.

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Small Agri-Biodiesel Producer Tax Credit

The Small Agri-Biodiesel Producer Tax Credit originally expired on December 31, 2017, but was retroactively extended through December 31, 2020, by the Further Consolidated Appropriations Act, 2020 (Pub. L. No. 116-94). A small agri-biodiesel producer registered with the IRS may be eligible for a $0.10 per gallon income tax credit for agri-biodiesel produced. Renewable diesel does not qualify for this credit.

 

The credit applies to the first 15 million gallons of agri-biodiesel produced in a tax year by an eligible small producer (IRC § 40A(b)(4)(C)). The fuel must be used or sold in one of the following qualifying ways (IRC § 40A(b)(4)(B)(i)):

  • Sold and used by the purchaser in a trade or business to produce an agri-biodiesel and diesel fuel mixture (excluding casual off-farm production);

  • Sold and used by the purchaser as a fuel in a trade or business;

  • Sold at retail and placed directly into the fuel tank of a motor vehicle;​​

  • Used by the producer in a trade or business to produce an agri-biodiesel and diesel fuel mixture; or

  • Used by the producer as a fuel in a trade or business.

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RC § 40A(e)(1) defines an “eligible small agri-biodiesel producer” as a person whose productive capacity for agri-biodiesel does not exceed 60 million gallons during the taxable year. IRC § 40A(d)(2) defines “agri-biodiesel” as diesel fuel derived solely from virgin oils (e.g., corn, soybeans, sunflower seeds, cottonseeds, canola, rapeseed, flaxseed, camelina) or animal fats.

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Certification

To claim a credit under IRC § 40A, the taxpayer must generally attach a Certificate for Biodiesel and, if applicable, a Statement of Biodiesel Reseller (see Notice 2005-62) to Form 8864. The certificate must identify the fuel as biodiesel, agri-biodiesel, or renewable diesel and confirm that it meets EPA registration and ASTM specification requirements (D6751 for biodiesel; D975 or D396 for renewable diesel).

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If the certificate or statement was submitted with a prior claim, the taxpayer must instead attach a statement that includes:

  • Certificate identification number;

  • Total gallons of biodiesel, agri-biodiesel, or renewable diesel covered by the certificate;

  • Total gallons claimed on Form 8849, Claim for Refund of Excise Taxes, Schedule 3 (Certain Fuel Mixtures and the Alternative Fuel Credit);

  • Total gallons claimed on Form 720, Schedule C (Quarterly Federal Excise Tax Return);

  • Total gallons claimed on Form 4136, (Credit for Federal Tax Paid on Fuels).

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See Notice 2005-62, 2005-35 I.R.B. 443, or Pub. 510, Excise Taxes, for the model certificate, reseller statements, and excise tax reporting guidance.​​

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All producers and importers of biodiesel or renewable diesel, and all blenders of taxable fuel, must be registered with the IRS to claim credits or refunds. Registration is completed using Form 637, Application for Registration.

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Coordination With Excise Tax Credit

A taxpayer may not claim more than one credit for the same gallon of biodiesel or renewable diesel. If a credit is claimed (or will be claimed) on Form 720, Form 8849 (Claim for Refund of Excise Taxes), or Form 4136 (Credit for Federal Tax Paid on Fuels), then the same gallon cannot be claimed again on Form 8864. This coordination rule prevents double benefits across income and excise tax credits.

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IRC § 40A(c) requires that the amount of the credit under IRC § 40A be reduced to reflect any benefit received under IRC § 6426 (excise tax credit for fuel mixtures) or IRC § 6427(e) (payments for alternative fuels). This ensures that taxpayers do not receive duplicate credits for the same fuel.

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Recapture of Credit

In general, a recapture tax may apply to each gallon of biodiesel or renewable diesel for which a credit was claimed if any of the following occurs:

  • The fuel (or mixture) is used for a purpose other than as a fuel; 

  • The fuel is purchased at retail and used to create a mixture;

  • The fuel is separated from a previously qualified mixture;

  • Agri-biodiesel credited under the Small Producer Credit is used in a manner not qualifying under IRC § 40A(b)(4)(B).

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If any of the above recapture conditions apply, the taxpayer must report the excise tax on Form 720, Part II, using IRS No. 117 for the applicable quarter.

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