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Alternative Fuel Tax Credit: Do You Qualify?

An update to the alternative fuel tax credit was among the many changes to tax passed in the December 2019 government funding bill. With this update a taxpayer that uses or sells alternative fuel for use in motor vehicles, motorboats, or aviation can claim a credit. This credit is retroactive to 2018, so if your business uses substantial amounts of alternative fuel it could be a smart move to restate your 2018 taxes.

The Tax Update

Under section 6426(d), a taxpayer that uses or sells alternative fuel for use in motor vehicles, motorboats, or aviation can claim a credit against its section 4041 excise tax liability. The alternative fuel credit is $0.50 per gallon of liquid alternative fuels and $0.50 per gasoline gallon equivalent of non-liquid fuels.

On January 15th the IRS issued Notice 2020-8 providing rules to follow to make a one-time claim for payment of the credits. The notice describes payments allowable under §§ 6426(c), 6426(d), and 6427(e) of the Internal Revenue Code for biodiesel (including renewable diesel) mixtures and alternative fuels. These tax incentives apply to fuel sold or used during calendar years 2018 and 2019.

Definition of “Alternative Fuel”

Alternative fuels include the following:

  • Liquefied petroleum gas (propane, butane, etc.)
  • P Series fuels (renewable non-petroleum-based fuels)
  • Compressed or liquefied natural gas
  • Liquefied hydrogen
  • Any liquid fuel that meets the carbon capture requirements of section 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)
  • Compressed or liquefied gas derived from biomass, and
  • Liquefied fuel derived from biomass.

Alternative fuels do not include ethanol, methanol, biodiesel or any fuel derived from the production of paper or pulp. In order to claim the credit, the taxpayer must be registered under section 4101 by filing Form 637, Application for Registration (for Certain Excise Tax Activities).

Example

Many businesses using forklifts have converted the forklifts to run on propane instead of diesel. This conversion to propane qualifies as an alternative fuel.

If a business with a fleet of forklifts that have been converted consumes 5,000 gallons of fuel in 2018 the tax credit would be

Forklifts Gallons of LPG/Year  Alt Fuel Savings Per year
5 10000 $3,695
10 20000 $7,391
20 40000 $14,782
25 50000 $18,477

So the tax offset would be approximately $0.37 cents per GGE, which would apply in a dollar to dollar basis to offset federal taxes owed. Alternatively, the company could receive a refund if the offset is greater than the federal taxes owed.

Curious what this could mean for your business? Use this calculator to see what tax incentive your fuel usage or sales could garner.

Taking advantage of the credit – should you pursue a 2018 credit?

This tax credit could be very beneficial to companies in many industries.  If your business uses alternative fuels, talk your Frazier & Deeter tax specialist to consider tax planning implications, and whether restating 2018 taxes makes sense for your business.

There is a time limit and specific procedures to follow to claim this credit.

The 180-day claim period for 2018 – 2019 biodiesel and alternative fuel incentives begins on February 14, 2020 and ends on August 11, 2020. The IRS will not process claims filed after that date, so now is the time to look into this opportunity to understand what it could mean for your business.

About the author

Tommy Zavieh is the partner who leads FD’s National R&D tax credit practice. He has over 20 years of engineering, consulting and R&D tax credit experience.  Tommy has helped organizations in the U.S. and foreign jurisdictions realize significant tax credits.

 

 

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