Federal Tax Incentives: 

IRC § 6426 Credit For Alcohol Fuel, Biodiesel, & Alternative Fuel Mixtures

Background 

 

The U.S. government imposes excise taxes on a variety of liquid fuels. In addition to heavy-vehicle use taxes (e.g. IRC § 4481, Form 2290, Heavy Highway Vehicle Use Tax Return) and truck/trailer sales taxes (e.g. IRC § 4051, Form 720, Quarterly Federal Excise Tax Return), these excise taxes are collected by the IRS and transferred to the federal Highway Trust Fund. Once deposited into the federal Highway Trust Fund, the taxes are typically distributed to individual states based on congressional policy.

In general, the federal Highway Trust Fund contains three accounts:

  • a highway account that funds road construction;

  • a mass transit account that funds transit-related projects; and

  • a leaking underground storage tank (LUST) account that, as the name implies, funds the remediation of leakage issues involving underground storage tanks.

Because the taxes fund road and transit projects, the transactions subject to fuel excise taxes generally involve fuels used to power trains, cars, boats, and aircraft. When using a fuel for a different purpose, a taxpayer is likely to be exempt from the fuel excise tax. However, when a taxpayer may use fuel for a “nontaxable use” regarding excise tax purposes, the same fuel may qualify for federal income tax credits (e.g. IRC § 6427). This is critical for taxpayers that may erroneously assume they are ineligible for various federal fuel credits (e.g. IRC §§ 6426, 6427, 40A) and potential refund payments unless they incur a fuel excise tax liability. While a fuel excise tax obligation may be offset by applicable federal credits, a fuel excise tax obligation is not a prerequisite to claiming certain associated federal income tax credits.

In general, once a fuel leaves a refinery, it typically passes through various secondary channels before reaching the final consumer. However, generally any gallon of fuel should be subject to tax only once. For example, If a fuel purchaser pays the excise tax on a fuel and can substantiate that another taxpayer has already paid the excise taxes due, the purchaser may be eligible to submit a claim for refund of fuel excise taxes paid as contained in IRC §§ 4041 and 4081.

Recently, the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as part of the Further Consolidated Appropriations Act, 2020, retroactively extended certain tax benefits applicable to fuel production and usage through at least the end of 2020. Among many items, the Taxpayer Certainty and Disaster Tax Relief Act of 2019 extended the excise tax credits and payments for biodiesel mixture fuels through December 31, 2022, and for alternative fuels (including alternative mixture fuels) through December 31, 2020, as allowable under IRC §§ 6426(c), 6426(d), and 6427(e). It also extended the excise tax credit for alternative fuel mixtures, with clarifying language, through December 31, 2020. Under prior law, these incentives had expired on December 31, 2017.

Blenders of biodiesel (including renewable diesel) mixtures and taxpayers that sell or use alternative fuel as a fuel in a motor vehicle or motorboat or in aviation may also claim any excess credit under IRC § 6426(c) [Biodiesel Mixture Tax Credit] or IRC § 6426(d) [Alternative Fuel Tax Credit] as a payment under IRC § 6427(e) or as a refundable income tax credit under IRC § 34. As an alternative to the payments and credits allowed under IRC §§ 6426, 6427, and 34, a blender of a biodiesel (including renewable diesel) mixture may claim a nonrefundable income tax credit under IRC § 40A.

IRC § 6426(a) Allowance Of Credits Against Fuel Excise Taxes

  • IRC § 6426(a)(1) allows as a credit against the tax imposed by IRC § 4081 an amount equal to the sum of the  following:

    • ​IRC § 6426(c) Biodiesel Mixture Credit and 

      • IRC § 6426(a) and (c) allows a blender of a biodiesel (including renewable diesel) mixture to claim a $1.00 per gallon credit against its tax liability under IRC § 4081 (relating to the tax imposed on taxable fuel).

    • IRC § 6426(e) Alternative Fuel Mixture Credit

      • Similarly, IRC § 6426(a) and (e) allows a blender of an alternative fuel mixture to claim a credit against its tax liability under IRC § 4081, except that the credit amount is $0.50 per gallon.​​​

  • IRC § 6426(a)(2) allows as a credit against the tax imposed by IRC § 4041 an amount equal to the IRC § 6426(d) Alternative Fuel Credit

    • IRC §§ 6426(a) and (d) allows a person that sells or uses alternative fuel as a fuel in a motor vehicle or motorboat or in aviation to claim a $0.50 per gallon credit against the claimant’s tax liability under IRC § 4041 (relating to the tax imposed on diesel fuel and alternative fuel).

Previously these credits and payments expired for sales and uses after December 31, 2017. However, Sections 121(b)(1)(A) and (B) and 133(a)(1) and (2) of the Taxpayer Certainty and Disaster Tax Relief Act of 2019, apart of H.R.1865 - Further Consolidated Appropriations Act, 2020, reinstate the biodiesel mixture credit for sales and uses through 2022, and the alternative fuel credit and alternative fuel mixture credit for sales and uses through 2020.​​​

For additional details, procedures, and implications on claiming these available fuel credits see below.

Credits Against Fuel Excise Taxes:

As a result of the extension, IRC § 6426 continues to allow the following excise tax credits (as listed below) imposed by IRC §§ 4041 and 4081 for alternative fuel, biodiesel mixtures, and alternative fuel mixtures produced in the United States and sold or used by the taxpayer. Note, the alcohol fuel mixture credit provided in IRC § 6426(b) expired on Dec. 31, 2011, but it is still available for taxpayers with open tax years up to this date.

Biodiesel Mixture Tax Credit (IRC § 6426(c))

The Biodiesel Mixture Tax Credit is available through December 31, 2022, at a rate of $1.00 per gallon of biodiesel used by the taxpayer in producing any biodiesel mixture for sale or use in its trade or business as a tax credit against IRC § 4081 excise taxes. In general, a “biodiesel mixture” means a mixture containing biodiesel and diesel fuel, which the taxpayer sells or uses as a fuel. 

Biodiesel Mixture Tax Credit: Tax Offset

IRC § 6426(a)(1) provides, in general, ​the biodiesel mixture credits must be used first to offset the taxpayer's excise tax liability under IRC § 4081 (relating to the tax imposed on taxable fuel).​ ​IRC § 4081 imposes an excise tax on:

  • The removal of a taxable fuel from any refinery or terminal;

  • Entry into the United States of any taxable fuel for consumption, use, or warehousing; and

  • The sale of a taxable fuel to any person who is not registered under IRC § 4101 unless there was a prior taxable removal or entry of the fuel.

The IRC § 4081 “taxable fuels” referred to above are gasoline, kerosene, and diesel. The rates of tax are 18.3 cents per gallon for gasoline and 24.3 cents per gallon for kerosene and diesel.


Biodiesel Mixture Tax Credit: Payments for Excess Credits

IRC § 6427(e) further provides that if a person produces a mixture described in IRC § 6426 or sells or uses an alternative fuel in its trade or business to power a motor vehicle or motorboat, Treasury will pay that person an amount equal to the applicable IRC § 6426 fuel credit. In essence, IRC § 6427(e) ensures that a taxpayer will receive the full benefit of its fuel tax credits, even if the credits exceed the taxpayer’s federal excise tax liability, and even if the taxpayer had no excise tax liability to begin with.

IRC § 6427(e)(6)(B) provides any Biodiesel Mixture (as defined in IRC § 6426(c)(3)) sold or used no later than December 31, 2022 may be eligible for payment from the Treasury in excess of the taxpayer's federal excise tax liability.

 

The taxpayer can then claim the excess credit amount either as a payment under IRC Section 6427(e) or as a refundable income tax credit under IRC § 34(a). See also IRC § 6427(e)(6)(B).

IRC § 6427(k) dictates whether a taxpayer can receive a payment or must file for an income tax credit on its annual income tax return. Generally, IRC § 6427(k) provides that the entities eligible to receive payments are those not subject to federal income taxes, namely governmental entities and tax-exempt organizations.

 

With two exceptions, all other entities are generally required to file a Form 4136, Credit for Federal Tax Paid on Fuels, with their federal income tax returns to claim a federal income tax refund. Exceptions exist for

  • (1) taxpayers with aggregate quarterly fuel excise tax liabilities of at least $750, and

  • (2) claims filed with respect to a fuel mixture or alternative fuel for any period that is not less than one week and for which the claim is $200 or more under IRC §§ 6427(e)(1) or (e)(2).​

    • For example, ​if the taxpayer had an alternative fuel claim for the period over $200, it could claim the remaining excess credits over its excise tax on Schedule C of Form 720 or use Schedule 3 of Form 8849, Claim for Refund of Excise Taxes.

A taxpayer that does not have an excise tax liability cannot use Form 720 or 8849. Instead, it must generally use Form 4136 to claim a refundable income tax credit under IRC § 34.

Biodiesel Mixture Tax Credit: Income Tax Credits 

If a taxpayer is not eligible for, or does not timely file an allowable claim for, payment under IRC § 6427(e) but used the fuel in a way that qualifies for the tax credits contained in IRC § 6426, IRC § 34 allows the claimant to file the claim as a refundable income tax credit.

 

The IRC § 34 credit is the sum of the following credits:

  • gasoline farming (IRC § 6420),

  • special use (IRC § 6421), and

  • *nontaxable use (IRC § 6427) credits.​

 

To claim a IRC § 34 credit, it is necessary to file Form 4136, Credit for Federal Tax Paid on Fuels as an attachment to the taxpayer’s income tax return. These claims must be made within three years from the date the taxpayer’s income tax return was filed or two years from the time the income tax was paid, whichever is later.

 

Taxpayers may “elect out” of the IRC § 6426 excise tax credit regime altogether and claim a nonrefundable income tax credit under either IRC § 40 (alcohol) or IRC § 40A (biodiesel and renewable diesel).

  • The disadvantage of taking this approach is that IRC § 87 provides that the credit amounts determined under IRC §§ 40 and 40A are required to be included in a taxpayer’s gross income for the year in which the credit is determined. However, this issue was previously addressed in Chief Counsel Advice (CCA) 201342010, which concluded that, for biodiesel blenders that do not opt for the IRC § 40A credit but instead claim IRC § 6426(c) credits and IRC § 6427(e) payments, the credits and payments in excess of a taxpayer’s excise tax liability are not items of gross income for federal income tax purposes

  • Note, the IRS also previously issued CCA 201406001, which provides that taxpayers must first offset any IRC §§ 4041 or 4081 excise tax liability with the excise tax credits contained in IRC §§ 6426(b), (c), (d), or (e) before taking the expenses into account for income tax purposes. After doing so, to the extent the excise tax credit exceeds the taxpayer’s excise tax liability, the taxpayer can make a claim for payment under IRC § 6427(e) or a refundable income tax credit under IRC § 34. These excess amounts would not be includible in a taxpayer’s gross income.

    • The IRS’s position in CCA 201406001 is that fuel excise tax credits utilized by a taxpayer otherwise are a deductible excise tax liability.

      • For example, if a taxpayer incurred $1000 of excise tax liability under either IRC §§ 4041 or 4081, the taxpayer could deduct the $1000 expense as an ordinary and necessary business expense or include the tax as a cost of goods sold. If the taxpayer claims an $800 excise tax credit associated with the liability under IRC § 6426(a), it would need to reduce, dollar for dollar, the amount that it deducted or included in cost of goods sold. In this case, after applying the $800 excise tax credit against its $1000 excise tax liability, the taxpayer would be left with either a $200 ordinary and necessary business expense deduction or $200 in costs of goods sold.

  • Although the referenced CCAs do not specifically address the other fuel credits contained in IRC § 6426, the same treatment that applied to biodiesel mixtures should generally apply to alcohol fuel and alternative fuel mixture credits since those credits operate in the same manner.

Claims for payment under IRC § 6427(e) must be filed on or before the last day of the first quarter following the earliest quarter of the claimant’s income tax year included in the claim.

  • For example, a calendar-year claimant’s claim for an alternative fuel sold or used during June and July must be filed by Sept. 30 of the same calendar year.​

  • Note: If a taxpayer receives a payment under IRC § 6427(e) for a mixture for which the taxpayer could have been allowed a credit under IRC § 6426, the amount of the payment is considered an “excessive amount” for purposes of IRC § 6206.

    • This amount, and any civil penalties imposed by IRC § 6675, can be assessed by the IRS and collected as if they were taxes imposed by IRC § 4081.

    • Similarly, if a taxpayer claims an income tax credit on Form 4136 for a mixture for which it was allowed a credit under IRC § 6426, the income tax rules related to assessing an underpayment of income tax liability apply​

Biodiesel Mixture Tax Credit: Certification Statement

  • To claim the biodiesel mixture credit, a taxpayer must obtain a certification statement as provided in Notice 2005-62 from the producer (or reseller) of the biodiesel that identifies the product produced and the percentage of biodiesel and agri-biodiesel in the product. 

  • For the most recent  rules claimants must follow to make a one-time claim for payment of the credits and payments allowable under §§ 6426(c), 6426(d), and 6427(e) of the Internal Revenue Code (Code) for biodiesel (including renewable diesel) mixtures and alternative fuels sold or used during calendar years 2018 and 2019, see, Notice 2020-8.

The Alternative Fuel Tax Credit (IRC § 6426(d))

The Alternative Fuel Tax Credit is available through December 31, 2020, at a rate of $0.50 per gallon of an alternative fuel sold by the taxpayer for use as a fuel in a motor vehicle, motorboat, or in aviation as a credit offsetting a taxpayer’s IRC § 4041 excise tax liability for the sale or use of alternative fuels. The Alternative Fuel Tax Credit represents the only IRC § 6426 credit that does not involve some type of fuel mixture and requires the taxpayer to be registered with the IRS as an alternative fueler.​

The Alternative Fuel Tax Credit: Tax Offset

IRC § 6426(a)(2) provides, in general, the alternative fuel credit must be used to first offset the taxpayer's excise tax liability under IRC § 4041 (relating to the tax imposed on diesel fuel and alternative fuel). IRC § 4041 often serves as a back-up tax for fuels that are not taxed under IRC § 4081.

 

In general, IRC § 4041 imposes excise taxes on fuels used for specific purposes, including powering highway vehicles, trains, motor vehicles, motorboats, and aircraft. The person selling the fuel to the owner, lessee, or other operator of the vehicle is responsible for the tax. IRC § 4041(a)(1) imposes a excise tax on any liquid other than gasoline (as defined in IRC § 4083) that is

  • (i) sold by any person to an operator of a diesel-powered highway vehicle for use as a fuel in such vehicle, or

  • (ii) used by any person as a fuel in a diesel-powered highway vehicle unless there was a taxable sale of the fuel under IRC § 4041(a)(1)(i). No tax is imposed, however, on the sale or use of any liquid on which tax was imposed under IRC § 4081 (other than tax at the Leaking Underground Storage Tank Trust Fund financing rate) and not credited or refunded. 

IRC §§ 4041(a)(1) and 4083(a)(1) provide the term “taxable fuel” generally includes the following fuel types:

  • Diesel;

  • Kerosene;

  • Alternative fuels;

  • Compressed natural gas; and

  • Fuels used in aviation.

 

IRC § 6426(d)(4) Carbon Capture Requirement

  • In general, the fuel must also be certified as required by the Secretary, as having been derived from coal produced at a gasification facility which separates and sequesters not less than the applicable percentage of such facility's total carbon dioxide emissions.

  • IRC § 6426(d)(4)(B) states the applicable percentage is—

    • ​50% in the case of fuel produced after September 30, 2009, and on or before December 30, 2009, and

    • 75% in the case of fuel produced after December 30, 2009.

 

The​ IRC § 4041 rate varies between 18.3 cents and 24.3 cents per gallon, depending on the fuel type. See IRC § 4041(a)(2) and IRC § 4041(a)(3)(A). Aviation fuel under IRC § 4041 is generally taxed at 21.8 cents per gallon or 4.3 cents per gallon. See IRC § 4041(c).

 

IRC § 4041(b)(1)(A) provides an exemption from the tax imposed by IRC § 4041(a) for certain fuels sold for use or used in an off-highway business use. Under IRC § 4041(b)(1)(C), the term “off-highway business use” has the meaning given to such term by IRC § 6421(e)(2), except that such term does not, for purposes of IRC § 4041(a)(1), include use in a diesel-powered train. IRC § 6421(a) provides that if gasoline is used in an off-highway business use, the Secretary shall pay (without interest) to the ultimate purchaser of such gasoline an amount equal to the amount determined by multiplying the number of gallons so used by the rate at which tax was imposed on such gasoline under IRC § 4081. Section 4081 imposes tax on certain removals, entries, and sales of taxable fuel.

IRC § 6421(e)(2)(A) defines the term "off-highway business use" generally to mean any use by a person in a trade or business of such person or in an activity of such person described in IRC § 212 (relating to production of income) otherwise than as a fuel in a highway vehicle.

In general, fuel excise taxes are imposed on fuel that is used in the nation’s transportation systems. If a fuel is used for another purpose, it may be considered a "nontaxable use of the fuel". Taxpayers paying excise taxes on fuels used for nontaxable purposes may claim credits or refunds for any excise taxes paid. Taxpayers should report nontaxable uses of fuel on Schedule C of Form 720.

 

However, the general rule contained in IRC § 6427(a) provides that if an excise tax has been imposed on the sale of an alternative fuel and the ultimate purchaser uses the fuel for a nontaxable use, Treasury shall pay to the ultimate purchaser an amount equal to the excise taxes imposed on the sale. IRC § 6427(a) ensures that if a fuel is used for a nontaxable use, the party that paid the excise taxes has a mechanism for receiving a refund of the taxes paid

 

The following uses of fuels are considered nontaxable for excise tax purposes (see Publication 510, Excise Taxes), or the instructions for Form 720 for a complete list of nontaxable uses):

  • Fuels used for off-highway business uses (e.g., fuel used to power a generator for a business);

  • Fuels used on a farm for farming purposes (e.g., to power farming equipment);

  • Exported fuels;

  • Fuels used for intercity, school, and local buses;

  • Fuels used by a qualified blood collector organization;

  • Fuels used in an aircraft or vehicle owned by an aircraft museum;

  • Fuels exclusively for use by a nonprofit educational organization; and

  • Fuels exclusively for use by a state, a political subdivision of a state, or the District of Columbia.

 

IRC § 6427(l)(1) provides that except as otherwise provided in IRC §§ 6427(l) and 6427(k), if any diesel fuel or kerosene on which tax has been imposed by IRC §§ 4041 or 4081 is used by any person in a nontaxable use, the Secretary shall pay (without interest) to the ultimate purchaser of such fuel an amount equal to the aggregate amount of tax imposed on such fuel under IRC §§ 4041 or 4081, as the case may be, reduced by any payment made to the ultimate vendor under IRC § 6427(l)(4)(C)(i)

 

IRC § 6427(l)(2) defines the term “nontaxable use,” for purposes of IRC § 6427(l), to mean any use which is exempt from the tax imposed by IRC § 4041(a)(1) other than by reason of a prior imposition of tax.

Under Treas. Reg. § 48.4041-7, tax applies to all taxable liquid fuel sold for use or used as a fuel in the motor which is used to propel a diesel-powered vehicle or in the motor used to propel a motor vehicle, motorboat, or aircraft, even though the motor is also used for a purpose other than the propulsion of the vehicle, motorboat, or aircraft. Thus, if the motor of a diesel-powered highway vehicle or a motorboat operates special equipment by means of a power take-off or power transfer, tax applies to all taxable liquid fuel sold for this use or so used, whether or not the special equipment is mounted on the vehicle or boat.

  • For example, tax applies to diesel fuel sold to operate the mixing unit on a concrete mixer truck if the mixing unit is operated by means of a power take-off from the motor of the vehicle.

  • Similarly, tax applies to all taxable liquid fuel sold for use or used in a motor propelling a fuel oil truck even though the same motor is used to operate the pump (whether or not mounted on the truck) for discharging the fuel into customers’
    storage tanks.

  • However, tax does not apply to liquid fuel sold for use or used in a separate motor to operate special equipment (whether or not the equipment is mounted on the vehicle). 

Treas. Reg. § 48.6421-1(d)(1) provides that no credit or payment may be claimed in respect of gasoline used in a highway vehicle used in a trade or business or for the production of income solely by reason of the fact that the propulsion motor in the vehicle is also used for a purpose other than the propulsion of the vehicle.

  • Thus, if the propulsion motor of a highway vehicle (used in a trade or business or for the production​ of income) also operates special equipment, such as a mixing unit on a concrete mixer truck or a pump for discharging fuel from a tank truck, by means of a power take-off or power transfer, no credit or payment may be claimed in respect of the gasoline used to operate the special equipment.

 

Treas. Reg. § 48.6427-1(d) provides that the principles set forth in Treas. Reg. § 48.4041-7, relating to dual use of fuel, for determining whether liability is incurred under IRC § 4041 at the time of sale of the fuel, are equally applicable in determining whether a credit or payment is to be allowed under Treas. Reg. § 48.6427-1.​

Alternative Fuel Tax Credit: Payments for Excess Credits

IRC § 6427(e) further provides that if a person produces a mixture described in IRC § 6426 or sells or uses an alternative fuel in its trade or business to power a motor vehicle or motorboat, Treasury will pay that person an amount equal to the applicable IRC § 6426 fuel credit. In essence, IRC § 6427(e) ensures that a taxpayer will receive the full benefit of its fuel tax credits, even if the credits exceed the taxpayer’s federal excise tax liability, and even if the taxpayer had no excise tax liability to begin with.

IRC § 6427(e)(6)(C) provides any any Alternative Fuel (as defined in section 6426(d)(2)) sold or used no later than December 31, 2020 may be eligible for payment from the Treasury in excess of the taxpayer's federal excise tax liability. Note, IRC § 6427(e) does NOT apply to the Alternative Fuel Mixture Credit (as defined in IRC § 6426(e) and discussed further below) for periods after Dec. 31, 2011 pursuant to IRC § 6427(e)(6)(D).

The taxpayer can then claim the excess credit amount either as a payment under IRC Section 6427(e) or as a refundable income tax credit under IRC Section 34(a). See also I.R.C. § 6427(e)(6)(C).

 

IRC § 6427(k) dictates whether a taxpayer can receive a payment or must file for an income tax credit on its annual income tax return.

  • Generally, IRC § 6427(k) provides that the entities eligible to receive payments are those not subject to federal income taxes, namely governmental entities and tax-exempt organizations.

  • With two exceptions, all other entities are required to file a Form 4136, Credit for Federal Tax Paid on Fuels, with their federal income tax returns to claim a federal income tax refund. Exceptions exist for

    • (1) taxpayers with aggregate quarterly fuel excise tax liabilities of at least $750, and

    • (2) claims filed with respect to a fuel mixture or alternative fuel for any period that is not less than one week and for which the claim is $200 or more under IRC §§ 6427(e)(1) or (e)(2).​

  • For example, ​if the taxpayer had an alternative fuel claim for the period over $200, it could claim the remaining excess credits over its excise tax on Schedule C of Form 720 or use Schedule 3 of Form 8849, Claim for Refund of Excise Taxes.

  • A taxpayer that does not have an excise tax liability cannot use Form 720 or 8849. Instead, it must use Form 4136 to claim a refundable income tax credit under IRC § 34.

Alternative Fuel Tax Credit: Income Tax Credits:

  • For additional details, see "​Biodiesel Mixture Credit, Income Tax Credits" section above for similar treatment.

Alternative Fuel Tax Credit: Registration Requirement

To claim the alternative fuel and alternative fuel mixture credits, the claimant must be registered under IRC § 4101. The credit or payment ("refund') is typically reported on Schedule C (Form 720, Quarterly Federal Excise Tax Return) or Form 8849, Claim for Refund of Excise Taxes.

IRC § 6426(a)(2) states no credit shall be allowed in the case of the credits described in § 6426(d) "Alternative fuel credit" and IRC § 6426(e) "Alternative fuel mixture credit" unless the taxpayer is registered under section 4101.

  • IRC § 4101(a)(1) "Registration" provides in general, every person required by the Secretary to register under this section with respect to the tax imposed by IRC §§ 4041(a) or 4081, every person producing or importing biodiesel (as defined in IRC § 40A(d)(1)) or alcohol (as defined in IRC § 6426(b)(4)(A)), and  every person producing second generation biofuel (as defined in IRC § 40(b)(6)(E)) shall register with the Secretary at such time, in such form and manner, and subject to such terms and conditions, as the Secretary may by regulations prescribe. A registration under this section may be used only in accordance with regulations prescribed under this section.

  • IRC § 4081’s reference to IRC § 4101 highlights an important point. IRC § 4101 requires certain taxpayers to register with the IRS by filing Form 637, Application for Registration (for Certain Excise Tax Activities), when they are engaged in activities subject to excise taxes. The penalty for failing to register is $10,000 for the initial failure and $1,000 for each day thereafter. Given the large penalties for failing to register, taxpayers with substantial fuel transactions should take the steps necessary to determine whether they are required to register. 

 

Generally, the following “persons” are required to register:

  • Blenders;

  • Enterers (usually the fuel importer);

  • Pipeline operators;

  • Position holders;

  • Refiners;

  • Terminal operators;

  • Vessel operators; and

  • Bus and train operators.

A person may, but is not required to, register if the person is a:

  • Feedstock user;

  • Gasohol blender;

  • Industrial user;

  • Throughputter that is not a position holder;

  • Ultimate vendor; and

  • Ultimate vendor (blocked pump, i.e., fuel dispensed in a secure pump).

For the most recent  rules claimants must follow to make a one-time claim for payment of the credits and payments allowable under §§ 6426(c), 6426(d), and 6427(e) of the Internal Revenue Code (Code) for biodiesel (including renewable diesel) mixturesand alternative fuels sold or used during calendar years 2018 and 2019, see, Notice 2020-8.

The Alternative Fuel Mixture Tax Credit (IRC § 6426(e))

The Alternative Fuel Mixture Tax Credit is available through December 31, 2020, at a rate of $0.50 per gallon of alternative fuel used by the taxpayer in producing any alternative fuel mixture for sale or use in its trade or business. 

 

For purposes of this credit only, the Taxpayer Certainty and Disaster Tax Relief Act of 2019 also prospectively (beginning on January 1, 2018) modifies the definition of fuels eligible to be included in a "mixture of alternative fuel" per IRC § 6426(e)(2) by excluding

  • liquified petroleum gas,

  • compressed or liquified natural gas, and

  • compressed liquified gas derived from biomass.

 

An “alternative fuel mixture” is a mixture of alternative fuel with gasoline, diesel, or kerosene that is sold or used by the taxpayer as a fuel. “Alternative fuels” consist of the following:

  • P Series Fuels (renewable nonpetroleum-based fuels) as defined by the Secretary of Energy under section 13211(2) of title 42, United States Code;

  • Liquefied hydrogen;

  • Any liquid fuel that meets the carbon capture requirements of IRC § 6426(d)(4) and that is derived from coal through the Fischer-Tropsch process (which converts a mixture of hydrogen and carbon monoxide into liquid fuel); and

  • Liquefied fuel derived from biomass (as defined in IRC § 45K(c)(3)).

IRC § 6426(d)(2)(G) states alternative fuels do not include ethanol, methanol, biodiesel, or any fuel (including lignin, wood residues, or spent pulping liquors) derived from the production of paper or pulp.

Alternative Fuel Mixture Tax Credit: Tax Offset:

IRC § 6426(a)(1) provides, in general, the alternative fuel mixture credits must also be used first to offset the taxpayer's excise tax liability under IRC § 4081 (relating to the tax imposed on taxable fuel).  A taxpayer claiming the alternative fuel mixture credit is limited to the amount of its IRC § 4081 (relating to the tax imposed on diesel fuel and alternative fuel) excise tax liability. For alternative fuel mixtures produced after Dec. 31, 2011, the alternative fuel mixture credit can be claimed only to the extent of the taxpayer’s excise tax liability. It is no longer possible to claim any excess alternative fuel mixture credit as a payment ("refund") under I.R.C. § 6427(e). See I.R.C. § 6427(e)(6)(D).

IRC § 4081(a)(1) imposes an excise tax on gasoline, diesel fuel and kerosene ("taxable fuel"):
•    The removal of a taxable fuel from any refinery or terminal;
•    Entry into the United States of any taxable fuel for consumption, use, or warehousing; and
•    The sale of a taxable fuel to any person who is not registered under IRC § 4101 unless there was a prior taxable removal or entry of such fuel per IRC §§ 4081(a)(1)(i) – (iii).

The IRC § 4081 “taxable fuels” referred to above are gasoline, kerosene, and diesel. The rates of tax are 18.3 cents per gallon for gasoline and 24.3 cents per gallon for kerosene and diesel. See IRC § 4081(a)(2). These rates do not include the additional tax of 0.1 cent per gallon imposed on such fuel to fund the Leaking Underground Storage Tank Trust Fund. 

Alternative Fuel Mixture Tax Credit: Registration Requirement

Similar to the Alternative Fuel Tax Credit, a taxpayer must be registered with the IRS as an alternative fueler under IRC § 4101 (using Form 637, Application for Registration (for Certain Excise Tax Activities) to claim this credit.

To claim the alternative fuel and alternative fuel mixture credits, the claimant must be registered under IRC § 4101. The credit or payment is typically reported on Schedule C (Form 720, Quarterly Federal Excise Tax Return) or Form 8849, Claim for Refund of Excise Taxes.

 

IRC § 4081’s reference to IRC § 4101 highlights an important point. IRC § 4101 requires certain taxpayers to register with the IRS by filing Form 637, Application for Registration (for Certain Excise Tax Activities), when they are engaged in activities subject to excise taxes. The penalty for failing to register is $10,000 for the initial failure and $1,000 for each day thereafter. Given the large penalties for failing to register, taxpayers with substantial fuel transactions should take the steps necessary to determine whether they are required to register.

 

Generally, the following “persons” are required to register:
•    Blenders;
•    Enterers (usually the fuel importer);
•    Pipeline operators;
•    Position holders;
•    Refiners;
•    Terminal operators;
•    Vessel operators; and
•    Bus and train operators.

 

A person may, but is not required to, register if the person is a:
•    Feedstock user;
•    Gasohol blender;
•    Industrial user;
•    Throughputter that is not a position holder;
•    Ultimate vendor; and
•    Ultimate vendor (blocked pump, i.e., fuel dispensed in a secure pump).

 

For the most recent  rules claimants must follow to make a one-time claim for payment of the credits and payments allowable under IRC §§ 6426(c), 6426(d), and 6427(e) of the Internal Revenue Code (Code) for biodiesel (including renewable diesel) mixtures and alternative fuels sold or used during calendar years 2018 and 2019, see, Notice 2020-8.

 

IRC § 6427: Fuels Not Used For Taxable Purposes

IRC § 6427(a) "Nontaxable Uses" states, except as provided in IRC § 6427(k) Income Tax Credit In Lieu Of Payment, if tax has been imposed under IRC § 4041(a)(2) "Alternative Fuels" or IRC § 4041(a)(3) "Compressed Natural Gas" or IRC § 4041(c) "Certain Liquids Used As A Fuel In Aviation" on the sale of any fuel and the purchaser uses such fuel other than for the use for which sold, or resells such fuel, the Secretary shall pay (without interest) to him an amount equal to the following:

  • the amount of tax imposed on the sale of the fuel to him, reduced by

  • if he uses the fuel, the amount of tax which would have been imposed under IRC § 4041 on such use if no tax under IRC § 4041 had been imposed on the sale of the fuel.

In general, IRC § 6427 provides for an income credit equal to the difference between

  • (i) the amount of the income tax credit specified in § 6427 with respect to the type of fuel sold and

  • (ii) the total amount of the excise tax credits permitted with respect to such fuel under IRC § 6426.

In the case of the income tax credit, the Secretary of the Treasury actually writes a refund check equal to the difference between the amount of the excise tax credit and the amount of the allowable income tax credit, to the extent that the taxpayer is not otherwise made “whole.” Finally, after application of § 6426 and § 6427, a credit may be  allowed under § 34.

By way of example, assuming that a seller sold a fuel that qualified for the credits, if the excise tax credit were 18¢ per gallon and the income tax credit were 50¢ per gallon, then the Secretary of the Treasury would issue a check equal to (i) the difference between those two amounts, (ii) times the number of gallons sold and subject to the tax, i.e., in the case of this example, 32¢ per gallon.

IRC 6427, Fuels Not Used for Taxable Purposes
Claims under this code section may include:

  • Intercity, local, or school buses

  • Use for farming purposes

  • Use by certain aircraft museums or in certain other aircraft uses

  • Biodiesel and alternative fuel

  • Blend stocks not used for producing taxable fuel

  • Nontaxable uses of diesel fuel and kerosene

  • Diesel fuel used to produce emulsion

Note: Treas. Reg. 48.6427-8, Diesel fuel and kerosene; claims by ultimate purchasers, illustrates specific requirements and examples for this claim type.

Paying the Excise Taxes Due

A taxpayer reports its fuel excise tax obligation on Form 720, Quarterly Federal Excise Tax Return. Once a taxpayer submits Form 720 and remits the excise taxes due, it is possible that 100% or more of the excise taxes paid can be refunded to the taxpayer if the fuel is being used for an exempt purpose or qualifies for any of several available fuel tax credits, refunds, or payments.

 

Part I of Form 720 contains a long list of the products subject to federal excise taxes. Twenty-four categories of fuel and transactions involving specific fuel types are subject to federal excise taxes.

 

For example, the following can trigger the excise tax on diesel fuel:

  • Removal of diesel at the terminal rack;

  • Taxable events other than removal at the terminal rack;

  • Sale or removal of biodiesel mixture other than removal at the terminal rack;

  • Removal of diesel-water fuel emulsion at the terminal rack or other taxable event; and

  • Sale of dyed diesel fuel (LUST tax).

Semimonthly deposits of excise taxes due: After determining its excise tax liability, a taxpayer is generally required to make semimonthly deposits of the taxes via electronic funds transfer (EFT). The taxes for a semimonthly period are due by the 14th day following the semimonthly period. Taxpayers with a net liability for taxes on Form 720, Part 1, of $2,500 or less are not required to make semimonthly deposits. Instead, the taxes are payable with the taxpayer’s federal income tax return.


To ensure timely deposits, the EFT should be initiated at least one day before the deposit is due (before 8 p.m. ET). When it is not possible to initiate the deposit one day before, there is a limited same-day payment option (see the Form 720 instructions). If a deposit due date falls on a nonbusiness day (e.g., weekends and legal holidays), the deposit will be considered on time if it is made by the close of the next business day. Taxpayers that either neglect to file the necessary Forms 720 or need to amend the forms should file an amended quarterly federal excise tax return using Form 720X, Amended Quarterly Federal Excise Tax Return.


When to file Form 720: Form 720 must be filed for each quarter of the calendar year as follows

  • Q1 (January-March): April 30

  • Q2 (April-June): July 31

  • Q3 (July-September): Oct. 31

  • Q4 (October-December): Jan. 31                                          

                 

IRS Notice 2020-08

Notice 2020-08 describes the procedure for claiming 2018 and 2019 biodiesel and alternative fuel incentives. Claimants that already filed "protective" or anticipatory claims for these incentives during these periods should refile their claims under the procedures prescribed by the Notice.

 

To make a one-time claim under the Notice for credits and payments allowable under IRC Sections 6426(c), 6426(d), and 6427(e) for the biodiesel mixture and alternative fuel tax credits, claimants must  submit Form 8849, Claim for Refund of Excise Taxes. 

  • Claimants must include Schedule 3 (Form 8849), Certain Fuel Mixtures and the Alternative Fuel Credit, and enter amounts for 2018 and 2019 biodiesel and alternative fuel incentives on Line 2 and Line 3, as appropriate.

  • They may not, however, file Form 720X to claim the excise tax credits for biodiesel mixtures and alternative fuels for 2018 and the first three quarters of 2019 or file Form 720 and a separate Form 8849 to claim a credit or payment for Q4 of 2019.

  • Each claimant must use a single Form 8849 to claim all eligible 2018 and 2019 biodiesel and alternative fuel incentives.

    • A one-time claim may be submitted from February 14, 2020, through August 11, 2020.

    • One-time claims filed after August 11, 2020, will not be processed or paid.

    • Any claim that is submitted by the method prescribed in the Notice before February 14, 2020, will be deemed by the IRS as being filed on February 14, 2020. Claims not paid within 60 days of being received will be paid with interest from the claim filing date.

Alternative fuel mixture claims under IRC Section 6426(e)

  • For 2018 and 2019, all alternative fuel mixture credit claims allowed by IRC Section 6426(e) must be made on Form 720X, Amended Quarterly Federal Excise Tax Return. 

  • Claimants must file separate Forms 720X for 2018 and 2019, entering claim amounts on Line 2 by quarter and identifying, again by quarter, the type of alternative fuels in the mixtures for which a credit is being claimed and the number of gallons of alternative fuels used by the claimant in producing the mixtures on Line 6.

  • The claim for an IRC Section 6426(e) credit for any quarter may not exceed the IRC Section 4081 liability incurred in the quarter for which the credit is being claimed.

  • To avoid processing delays or potential denial of the claim, claimants should file any outstanding Forms 720 for 2018 and 2019 before filing the Form 720X for which they are claiming the IRC Section 6426(e) alternative fuel mixture credit.

  • Claims for 2018 and 2019 alternative fuel mixture credits can be submitted beginning on February 14, 2020, and generally must be made within three years from the time the return was filed or two years from the time the tax was paid, whichever is later.

Registration requirements

  • Claimants must register with the IRS by filing Form 637, Application for Registration (For Certain Excise Tax Activities) to make alternative fuel claims under IRC Sections 6426(d) and 6427(e) and to make alternative fuel mixture claims under IRC Section 6426(e).

  • Registration is not required for biodiesel mixture credit claimants.

    • Such claimants may, however, be required to register as blenders of taxable fuel, and biodiesel mixture credit claims must be supported by a Certificate for Biodiesel prepared by the registered producer of the biodiesel in the mixture.

Implications​

  • The Notice does not impact 2018 and 2019 refundable income tax credit claims under IRC Section 34(a) for biodiesel mixtures and alternative fuel sold or used during those periods.

  • These claims should continue to be filed on Form 4136, Credit for Federal Taxes Paid of Fuels, and attached to the taxpayer's income tax return for the applicable year.

  • Because the refundable income tax credit is only available for amounts payable under IRC Section 6427 (amounts in excess of excise tax liability), claimants with excise tax liability under IRC Section 4041 (for alternative fuel credit claimants) or IRC Section 4081 (for biodiesel mixture credit claimants) should make their claims on the annual Form 8849 as prescribed by the Notice.

IRS Links, Notices, & Filing Requirements​
  • About Form 4136, Credit For Federal Tax Paid On Fuels​

  • IRS Notice 2020-8, Biodiesel and Alternative Fuels; Claims for 2018-2019

    • Notice sets forth the procedure for claiming biodiesel and alternative fuel incentives for 2018-2019.

      • Notice 2020-8 sets out the action steps for claimants to follow in filing claims for biodiesel and alternative fuel incentives. The notice states that all one-time claims for biodiesel and alternative fuel incentives for 2018-2019 must be filed on or before August 11, 2020, in accordance with the instructions in today’s notice.

      • Notice 2020-8 also provides procedures to claim the alternative fuel mixture credit allowable under section 6426(e) for 2018-2019. The period of limitations to file this claim is within three years from the time the return was filed or two years from the time the tax was paid, whichever is later.

  • IRS Notice 2015-56, Income tax treatment of 2014 fuel credits allowable under section 6426(c) and section 6426(d)

    • Informs claimants about the federal income tax treatment of credits under § 6426(c) and (d) of the Internal Revenue Code that are paid in cash under the one-time claim submission process of section 160(e) of the Tax Increase Prevention Act of 2014 (Act), Pub. L. No. 113-295, 128 Stat. 4023, and implemented by Notice 2015-3, 2015-6 I.R.B. 583.

    • Specifically, a claimant must reduce its income tax deduction for (or cost of goods sold deduction attributable to) § 4081 excise taxes for each calendar quarter during 2014 by the amount of the § 6426(c) credit for a biodiesel mixture sold or used during that calendar quarter.

    • Similarly, a claimant must reduce its income tax deduction for (or cost of goods sold deduction attributable to) § 4041 excise taxes for each calendar quarter during 2014 by amount of the § 6426(d) credit for alternative fuel sold or used during that calendar quarter. 

  • Excise Taxes (Including Fuel Tax Credits and Refunds (Mar. 2018)

  • Rev. Rul. 2018-2, Section 6426.—Credit for alcohol fuel, biodiesel, and alternative fuel mixtures 26 CFR 48.4081-1(c)(3): Gasoline blendstocks (Also Sections 4041, 4081, 4083.)​

    • Whether a mixture of butane and gasoline an alternative fuel mixture that qualifies for the alternative fuel mixture credit under § 6426(e) of the Internal Revenue Code (Code)?​

      • HOLDING: A mixture of butane (or other gasoline blendstock as defined in § 48.4081- 1(c)(3)(i)) and gasoline is a mixture of two taxable fuels. Therefore, it is not an alternative fuel mixture and does not qualify for the alternative fuel mixture credit under § 6426(e) of the Code.

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