Federal Tax Incentives:

Low-Sulfur Diesel Fuel Production Credit

Background

IRC § 45H, which was added to the Code by § 339(a) of the American Jobs Creation Act of 2004 (Public Law No. 108-357), provides a low sulfur diesel fuel production credit for low sulfur diesel fuel produced by a small business refiner. IRC § 45H(a) provides the amount of the low sulfur diesel fuel production credit determined under this section with respect to any facility of a small business refiner is an amount equal to 5 cents for each gallon of low sulfur diesel fuel produced during the taxable year by such small business refiner at such facility. Section 45H is effective for expenses paid or incurred after December 31, 2002, in taxable years ending after that date.

However, the total credits allowed for all tax years cannot be more than the refiner’s qualified costs limitation. See IRC § 45H(b)(1).

 

Below outlines the calculation authority, mechanics, and IRS guidelines for additional information on claiming the Federal Low Sulfur Diesel Fuel Production Credit. See links at the bottom for further insight.

Credit Calculation Mechanics and Authority 

IRC § 45H(a) states, in general, the amount of the low sulfur diesel fuel production credit determined under this section with respect to any facility of a small business refiner is an amount equal to 5 cents for each gallon of low sulfur diesel fuel produced during the taxable year by such small business refiner at such facility.

IRC § 45H(b)(1) provides that the aggregate credit determined under IRC § 45H(a) for any taxable year with respect to any facility shall not exceed—

  • (1) 25% of "Qualified Costs" incurred by the "Small Business Refiner" with respect to the facility, REDUCED BY​​

  • (2) The aggregate credits determined under § 45H for all prior taxable years with respect to the facility.

 

IRC § 45H(c)(2) states the term “qualified costs” means, with respect to any facility, those costs paid or incurred during the "Applicable Period" for compliance with the "Applicable EPA Regulations" with respect to such facility, including expenditures for the construction of new process operation units or the dismantling and reconstruction of existing process units to be used in the production of "Low Sulfur Diesel Fuel," associated adjacent or offsite equipment (including tankage, catalyst, and power supply), engineering, construction period interest, and sitework.

 

IRC § 45H(c)(3) states the term “Applicable EPA Regulations” means the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection Agency.

  • Heavy-duty highway vehicles for the 2007 and later model years must be fueled with highway diesel fuel that meets a maximum sulfur standard of 15 parts per million (ppm).

  • The applicable EPA regulations generally require petroleum refiners that produce diesel fuel for heavy-duty highway vehicles to produce this low sulfur diesel fuel beginning June 1, 2006.

  • However, the applicable EPA regulations may provide additional time to comply with the 15 ppm sulfur standard under certain circumstances.​

 

IRC § 45H(c)(4) states the term “Applicable Period” means, with respect to any facility, the period beginning on January 1, 2003, and ending on the earlier of the date which is 1 year after the date on which the taxpayer must comply with the applicable EPA regulations with respect to such facility or December 31, 2009.

IRC § 45H(c)(5) defines the term “Low Sulfur Diesel Fuel” as diesel fuel with a sulfur content of 15 parts per million (ppm) or less.

 

​IRC § 45H(c)(1) states the term “Small Business Refiner” means, with respect to any taxable year, a refiner of crude oil—

  • (1) with respect to which NOT more than 1,500 individuals are engaged in the refinery operations of the business on any day during such taxable year, and​

  • (2) the "Average Daily Domestic Refinery Run or Average Retained Production" of which for all facilities of the taxpayer for the 1-year period ending on December 31, 2002, did not exceed 205,000 barrels.

    • I.R.C. § 45H(d) Special Rule For Determination Of Refinery Runs —  For purposes of this section and section 179B(b), in the calculation of Average Daily Domestic Refinery Run or Retained Production, only refineries which on April 1, 2003, were refineries of the refiner or a related person (within the meaning of section 613A(d)(3)), shall be taken into account.

IRC § 45H(b)(2) provides a reduced percentage in the case of a Small Business Refiner with Average Daily Domestic Refinery Runs for the 1-year period ending on December 31, 2002, in excess of 155,000 barrels, the number of percentage points described ("25%") shall be reduced (not below zero) by the product of such number (before the application of this paragraph) and the ratio of such excess to 50,000 barrels.

  • Example. Your Average Daily Domestic Refinery Runs were 165,000 barrels for the 1-year period ending on December 31, 2002. First divide 10,000 (your excess over 155,000 barrels) by 50,000 to get 0.2. Next subtract 0.2 from 1.0 to get 0.8. Then multiply 25% (0.25) by 0.8 to get 20% (0.20). As such, the limitation provides a reduced percentage of 20% of the qualified costs for the facility that produced the fuel claimed for the tax period.​​​

IRC § 45H(e) Certification

No credit shall be allowed unless, not later than the date which is 30 months after the first day of the first taxable year in which the low sulfur diesel fuel production credit is determined with respect to a facility, the small business refiner obtains certification from the Secretary, after consultation with the Administrator of the Environmental Protection Agency, that the taxpayer's qualified costs with respect to such facility will result in compliance with the applicable EPA regulations.

An application for certification shall include relevant information regarding unit capacities and operating characteristics sufficient for the Secretary, after consultation with the Administrator of the Environmental Protection Agency, to determine that such qualified costs are necessary for compliance with the applicable EPA regulations. See IRC § 45H(e)(2).

Any application shall be reviewed and notice of certification, if applicable, shall be made within 60 days of receipt of such application. In the event the Secretary does not notify the taxpayer of the results of such certification within such period, the taxpayer may presume the certification to be issued until so notified. See IRC § 45H(e)(3).

Procedure for Obtaining Certification

For IRS & EPA Application Details: See Rev. Proc. 2007-69.

  • (1) Applications to the Internal Revenue Service (Industry Director, Natural Resources and Construction)

  • (2) Applications to the Environmental Protection Agency (Director, Compliance and Innovative Strategies Division)


The certification required under § 45H(f)(1) (relating to certifications by the Secretary that the taxpayer’s qualified costs with respect to the facility will result in compliance with the applicable EPA regulations) is issued by the Internal Revenue Service after consultation with the EPA. A taxpayer seeking to obtain such a certification must submit one paper copy and one electronic version of the application for certification under section 45H(f) to the Internal Revenue Service and one paper copy and one electronic version of the application to the EPA. Applications for certification under section 45H(f) should be marked.

 

The application for a certification with respect to a facility must contain the following information:

  • (1) The taxpayer’s name, address, and taxpayer identification number;

  • (2) A description of the facility;

  • (3) The unit capacities and operating characteristics of the facility;

  • (4) Whether the facility is currently producing low sulfur diesel fuel; and

  • (5) A description of the qualified capital costs with respect to the facility.

 

A separate application is required for each facility for which qualified capital costs are paid or incurred.

 

The following declaration must accompany an application: “Under penalties of perjury, I declare that I have examined this application, including accompanying documents, and to the best of my knowledge and belief, the facts presented are true, correct, and complete.” The declaration must be signed by a person authorized to submit the application on behalf of the taxpayer.

Note, the 60-day review period under § 45H(f)(3) does not begin until the Service receives a complete application.

  • The Service will notify the taxpayer whether certification has been granted or denied.

  • An application will not be considered complete if the Service, after the consultation with the EPA, determines that the application does not contain all of the information necessary to determine whether the taxpayer’s costs with respect to the facility result in compliance with the applicable EPA regulations.

  • If the Service does not notify the taxpayer that the application is incomplete within 60 days of receipt of the taxpayer’s application, a taxpayer may presume the application to be complete.

    • If the Service does not notify the taxpayer whether certification has been granted or denied within 60 days of receipt of the taxpayer’s complete application (or within 60 days of receipt of an application that is presumed to be complete), the taxpayer may presume that the certification has been granted during the period that begins 60 days after the receipt of the complete (or presumptively complete) application and ends on the date the taxpayer is notified that the application is denied or incomplete.​

The certification will ordinarily be granted with respect to a facility if—

  • the application is complete,

  • nothing in the application is inconsistent with a finding that the taxpayer’s qualified costs with respect to the facility will result in compliance with the applicable EPA regulations, and

  • the taxpayer has not been subject to a penalty under the applicable EPA regulations for a violation relating to that facility.

    • If the taxpayer has been subject to a penalty under the applicable EPA regulations for a violation relating to the facility, the Service, after consultation with the EPA, will take all relevant information into account in determining whether certification will be granted or denied.

If the taxpayer is permitted to presume for any period that the certification with respect to a facility has been granted—

  • (1) The taxpayer will be treated as satisfying the certification requirement of section 45H(f)(1) in determining whether the credit under section 45H is allowable with respect to fuel produced at the facility during that period; and

  • (2) The running of the 30-month period applicable to the facility under section 45H(f)(1) will be suspended for the period during which the taxpayer is permitted to presume the certification with respect to the facility has been granted.

Effect of Certification

Granting the certification establishes only that the taxpayer has satisfied the requirement of section 45H(f) and does not preclude the Service from examining a taxpayer’s return with respect to the low sulfur diesel fuel production credit. The certification does not establish that the taxpayer is a small business refiner, that fuel produced by the taxpayer is low sulfur diesel fuel, or that any expenditure is a qualified capital cost. Thus, the certification is not a determination by the Service that the costs the taxpayer identifies as qualified capital costs on the application for certification are, in fact, qualified capital costs.

 

Only one certification is required with respect to a facility. Thus, a taxpayer that incurs additional qualified capital costs with respect to a facility after obtaining a certification with respect to the facility is not required to obtain a new certification with respect to that facility.

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