United States

The IRS clarifies proper accounting period for deducting 2014 fuel credit

Notice 2015-56 updates procedures for claiming fuel tax credits

TAX ALERT  | 

On Aug. 14, 2015, the IRS issued Notice 2015-56, which provides guidance on when taxpayers must reduce deductions attributable to credits taken for biodiesel and alternative fuel tax credits in 2014. Specifically, the notice clarifies Notice 2015-3 issued Jan. 16, 2015, which provides rules for taxpayers to follow in order to claim credits and payments reinstated by the Tax Increase Prevention Act of 2014 for certain biodiesel and alternative fuel tax credits for calendar year 2014. (See our Feb. 5, 2015, article, Claiming biodiesel and alternative fuels excise tax credits for 2014.) The notices cover payments and credits allowed under section 6426(c) relating to biodiesel (including renewable diesel) mixtures, section 6426(d) relating to alternative fuels, section 6426(e) relating to alternative fuel mixtures, and section 6427(e) relating to alcohol, biodiesel or alternative fuels not used for taxable purposes.

Background

The U.S. government imposes excise taxes on different types and uses of certain fuels. The transactions generally subject to fuel excise taxes involve fuel used to power trains, cars, boats and aircraft. However, certain types of fuels from renewable sources are eligible for various exemptions, credits and other payments.

Notice 2015-56 addresses the credits and payments for certain excise taxes imposed under sections 4041 and 4081. Section 4041 imposes an excise tax on the following types of fuel:

  • Diesel
  • Kerosene
  • Alternative fuels
  • Compressed natural gas
  • Fuels used in aviation

Section 4081 imposes an excise tax on the following uses of taxable fuel (gasoline, kerosene and diesel):

  • 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
  • The sale of a taxable fuel to any person that is not registered under section 4101 (relating to registration and bond) unless there was a prior taxable removal or entry of the fuel

Credits against fuel excise taxes

Notice 2015-56 specifically addresses the credits and payments allowed under section 6426(c) for biodiesel mixtures, section 6426(d) for alternative fuels, and section 6416(e) for alternative fuel mixtures.

  • Biodiesel mixture credit: Under section 6426(c), a blender of biodiesel mixture can claim a credit against its section 4081 excise tax liability of $1.00 per gallon of biodiesel used in producing a biodiesel mixture. A biodiesel mixture means a biodiesel and diesel fuel mixture that the taxpayer uses or sells as a fuel.
  • Alternative fuel credit: Under section 6426(d), a taxpayer that sells or uses alternative fuel for use in motor vehicles, motorboats or aviation can claim a $0.50 per gallon credit against its tax liability under section 4041. Alternative fuels include the following:
    • liquefied petroleum gas (propane)
    • P Series fuels (renewable non-petroleum-based fuels)
    • compressed or liquefied natural gas
    • liquefied hydrogen
    • any liquid 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
    • liquefied fuel derived from biomass

    Alternative fuels do not include ethanol, methanol, biodiesel or any fuel derived from the production of paper or pulp.

  • Alternative fuel mixture credit: Under section 6426(e), a blender of an alternative fuel mixture can claim a $0.50 per gallon credit against its tax liability under section 4081. An alternative fuel mixture is a mixture of alternative fuel and gasoline, diesel or kerosene that the taxpayer uses or sells as a fuel. The alternative fuel mixture credit can only be used if the taxpayer has a section 4081 liability in the same quarter it sold or used the alternative fuel mixture. Furthermore, 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, and taxpayers are not allowed to claim any excess credits as payments.

Income tax treatment of 2014 fuel credits

Notice 2015-56 is the IRS's response to taxpayers' requests for clarification regarding whether the income tax deduction, or the cost of goods sold deduction, attributable to the biodiesel or alternative fuel credit claimed against excise taxes in 2014 is decreased. The notice states that taxpayers must reduce their excise tax liability for each calendar quarter during the 2014 calendar year by the biodiesel or alternative fuel credit taken during the calendar quarter, thus having the effect of reducing the corresponding income tax deduction attributable to the fuel used or sold. 

This issue is currently being litigated in the U.S. Court of Federal Claims by Sunoco Inc.  (Sunoco Inc. v. United States, No. 1:15-cv-00587 (Fed. Cl. 2015)). Sunoco Inc. alleges that it erroneously reduced the income tax deduction attributable to its section 4081 excise taxes by the amount of the credit which effectively included the amount of the credit in its income. The IRS denied Sunoco's refund claim upon its filing of an amended return claiming the full excise tax deductions. Several taxpayers are filing protective refund claims pending the outcome of the Sunoco case.

Conclusion

Notice 2015-3 provides the procedural rules for claiming biodiesel and alternative fuel credits reinstated by the Tax Increase and Prevention Act of 2014. The Act retroactively extended the credits and payments authorized under sections 6426(c), 6426(d), 6426(e) and 6427(e). Notice 2015-56 clarifies Notice 2015-3 by providing that taxpayers must reduce their excise tax liability for each calendar quarter during the 2014 calendar year by the biodiesel or alternative fuel sold or used during the calendar quarter and thus their income tax deduction.

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