Federal Tax Incentives:
Second Generation Biofuel Producer Tax Credit IRC § 40(b)(6)
Background
The Second Generation Biofuel Producer Credit (SGBPC) is an income tax credit determined under IRC §40(b)(6) and is claimed on Form 6478 as part of the general business credit. Congress has periodically extended the credit; most recently, the 2017, but was retroactively extended through December 31, 2020, by Public Law 116-94. Section 13202 of the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117‑169) extended several fuel credits through December 31, 2024. As a result, taxpayers may not claim the §40(b)(6) credit for fuel sold or used after December 31, 2024, unless Congress enacts a further extension. Eligible recipients are producers registered under §4101. Coordination rules under §40(c) reduce the §40 credit to reflect any benefit from §§4041(b)(2), 6426, or 6427(e) to prevent double benefits.
2025 Forward-Looking Considerations: Producers should evaluate the new technology‑neutral §45Z Clean Fuel Production Credit (effective for fuel produced after 12/31/2024 and sold by 12/31/2027).
A registered second generation biofuel producer may be eligible for a tax credit up to $1.01 per gallon of qualified second generation biofuel production that is:
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sold to another person for use in producing a qualified second generation biofuel mixture in that person’s trade or business (other than casual off‑farm production);
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sold to another person for use as a fuel in a trade or business; or
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sold at retail and placed in the purchaser’s fuel tank; or used/sold by the producer for any of the foregoing purposes.
Reduction for Alcohol Credits
If the fuel is alcohol, the $1.01 is reduced by the §40(b)(1) alcohol credit (without regard to the lower‑proof reduction) plus, in the case of ethanol, the §40(b)(4) small ethanol producer credit in effect at the time of production.
Gross‑Income Inclusion
The amount of the §40 credit must be included in gross income under §87.
Definition of Second Generation Biofuel & Feedstocks
In general, second generation biofuel is defined as liquid fuel produced from qualified feedstock—lignocellulosic or hemicellulosic matter available on a renewable or recurring basis, or cultivated algae, cyanobacteria, or lemna—and meeting EPA fuel/fuel‑additive registration under Clean Air Act §211.
Exclusions and Quality Thresholds
Excluded from “second generation biofuel” are:
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Alcohol with proof <150 (proof determined without regard to denaturants);
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Fuel with water/sediment >4% (by weight);
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Fuel with ash content >1% (by weight); or
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Fuel with an acid number >25.
U.S. Production and Use
For §40(b)(6) purposes, the Instructions to Form 6478 clarify that qualified second‑generation biofuel production does not include fuel that is not both produced in the United States (or a U.S. territory) and used as a fuel in the United States (or a U.S. territory).
Statutory Cross‑References and Definitions
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IRC §40(b)(6) – 2nd‑Generation Biofuel Producer Credit
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In general, the second generation biofuel producer credit of any taxpayer is equal to the "applicable amount" for each gallon of "qualified second generation biofuel production".
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IRC § 40(b)(6)(B) defines the "applicable amount” = $1.01/gal, reduced (as described above) for alcohol/ethanol by the sum of—
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the amount of the credit in effect for such alcohol under IRC § 40(b)(1) Alcohol Mixture Credit (without regard to subsection IRC § 40(b)(3) Smaller Credit For Lower Proof Alcohol) at the time of the qualified second generation biofuel production, plus
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in the case of ethanol, the amount of the credit in effect under IRC § 40(b)(4) Small Ethanol Producer Credit at the time of such production.
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“Qualified second generation biofuel production” and “qualified second generation biofuel mixture” are as defined in §40(b)(6)(C)–(D).
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IRC § 40(b)(6)(C) defines the term “qualified second generation biofuel production” means any second generation biofuel which is produced by the taxpayer, and which during the taxable year—
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is sold by the taxpayer to another person—
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for use by such other person in the production of a qualified second generation biofuel mixture in such other person's trade or business (other than casual off-farm production),
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for use by such other person as a fuel in a trade or business, or
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who sells such second generation biofuel at retail to another person and places such second generation biofuel in the fuel tank of such other person, or
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is used or sold by the taxpayer for any purpose described in IRC § 40(b)(6)(C)(i).
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The qualified second generation biofuel production of any taxpayer for any taxable year shall not include any alcohol which is purchased by the taxpayer and with respect to which such producer increases the proof of the alcohol by additional distillation.
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IRC § 40(b)(6)(D) defines the term “qualified second generation biofuel mixture” means a mixture of second generation biofuel and gasoline or of second generation biofuel and a special fuel which—
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is sold by the person producing such mixture to any person for use as a fuel, or
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is used as a fuel by the person producing such mixture.
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“Qualified feedstock” and “second generation biofuel” are as defined in §40(b)(6)(E)–(F).
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IRC § 40(b)(6)(E)(i) defines the term “second generation biofuel” means any liquid fuel which—
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is derived by, or from, qualified feedstocks, and IRC § 40(b)(6)(E)(ii)-(iii) states the term “second generation biofuel” shall not include the following:
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any alcohol with a proof of less than 150 pursuant to IRC § 40(b)(6)(E)(ii);
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The determination of the proof of any alcohol shall be made without regard to any added denaturants.
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any fuel if pursuant to IRC § 40(b)(6)(E)(iii)–-
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more than 4 percent of such fuel (determined by weight) is any combination of water and sediment,
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the ash content of such fuel is more than 1 percent (determined by weight), or
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such fuel has an acid number greater than 25.
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IRC § 40(b)(6)(F) defines the term “qualified feedstock” means—
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any lignocellulosic or hemicellulosic matter available on a renewable or recurring basis, and
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any cultivated algae, cyanobacteria, or lemna.
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meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act (42 U.S.C. 7545).
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Special algae rules under §40(b)(6)(G).
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In the case of fuel which is derived by, or from, feedstock described IRC § 40(b)(6)(F)(ii) (any cultivated algae, cyanobacteria, or lemna) and which is sold by the taxpayer to another person for refining by such other person into a fuel which meets the requirements of subparagraph IRC § 40(b)(6)(E)(i)(II) (meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act (42 U.S.C. 7545)) and the refined fuel is not excluded under IRC § 40(b)(6)(E)(iii)—
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such sale shall be treated as described in IRC § 40(b)(6)(C)(i),
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such fuel shall be treated as meeting the requirements of IRC § 40(b)(6)(E)(i)(II) and as not being excluded under IRC § 40(b)(6)(E)(iii) in the hands of such taxpayer, and
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except as provided in this subparagraph, such fuel (and any fuel derived from such fuel) shall not be taken into account under IRC § 40(b)(6)(C) with respect to the taxpayer or any other person.
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Registration requirement under §40(b)(6)(I) (registration as a producer under §4101 via Form 637).
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No §40(b)(6) credit is allowed unless the taxpayer is registered with the Secretary as a producer under §4101 (Form 637). For §45Z, the IRS has added activity letters CA (SAF) and CN (non‑SAF) and updated IRS procedures (IRM 4.24.2, Aug. 27, 2025). Historically, §40 filers entered an “SB” registration number on Form 6478.
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Coordination with excise credits
IRC §40(c): The §40 credit with respect to any alcohol shall be reduced to reflect any benefit provided solely by reason of §4041(b)(2), §6426, or §6427(e) (excise/mixture/refund regimes).
2025 transition to §45Z Clean Fuel Production Credit (new, 2025-2027)
For fuel produced after 12/31/2024, consider §45Z. The credit applies to domestically produced transportation fuel meeting lifecycle GHG thresholds (≤50 kg CO2e/mmBTU), requires facility/§4101 registration and other conditions, and is available transportation fuel produced in the U.S. after 12/31/2024 and sold through 12/31/2027. IRS Notice 2025‑10 (intent to propose regs) and Notice 2025‑11 (emissions rate table) provide operative guidance.