United States

IRS issues guidance for claiming 2017 fuel tax credits

TAX ALERT  | 

The IRS recently released Notice 2018-21, providing rules that taxpayers must follow in order to claim the fuel tax credits reinstated by the Bipartisan Budget Act of 2018 on Feb. 9, 2018. The notice provides the procedures for claiming credits and/or payments 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 biodiesel mixtures and alternative fuels sold or used in a trade or business. The notice also provides instructions for certain income tax credit claims for biodiesel, second generation biofuel, and alternative fuel. Further, the notice provides a temporary safe harbor provision for the semimonthly deposits of the oil spill liability tax that was reinstated as of March 1, 2018.

Fuel taxes and fuel tax credits

The federal government imposes excise taxes on various types and uses of fuel. Fuel may be taxable when it is removed from a refinery or terminal under section 4081 or when it is sold or used in the operation of a motor vehicle, train, boat, or aircraft under section 4041. However, there are several exemptions from these fuel taxes depending upon what the fuel is ultimately used for. Further, a taxpayer may be eligible for credits and payments which are available on the sale or use of certain fuels.

Excise tax credits

Section 6426 provides a credit against the excise taxes imposed by sections 4041 and 4081 for biodiesel mixtures, alternative fuels, and alternative fuel mixtures.

Biodiesel mixture credit: Under section 6426(c), a taxpayer that produces a biodiesel mixture for sale or for use in its trade or business may claim a credit against its section 4081 excise tax liability. The biodiesel mixture credit is $1.00 per gallon of biodiesel used in producing the biodiesel mixture. Section 6426(c)(3) defines “biodiesel mixture” as a mixture of biodiesel and diesel fuel which is either sold or used by the taxpayer producing the mixture. In order to be eligible for the credit, the taxpayer must obtain a certificate from the biodiesel producer that identifies the biodiesel as such and provides the percentage of biodiesel in the product.

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 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. 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).

Alternative fuel mixture credit

Under section 6426(e), a taxpayer that produces an alternative fuel mixture can claim a credit against its section 4081 excise tax liability. The alternative fuel mixture credit is $0.50 per gallon of alternative fuel used to produce the mixture. 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 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 (as discussed in the next section).

Excise tax payments and income tax credits for excess credits

After a taxpayer applies the fuel tax credits against its excise tax liability, as described above, an excess credit may occur due to the credits being at a higher rate than the tax. Section 6427(a) provides a mechanism for taxpayers that use fuel for a nontaxable use to receive a refund for the taxes paid. Furthermore, section 6427(e) provides for a payment in the amount of the excess fuel tax credit for biodiesel mixtures or alternative fuels sold or used in the taxpayer’s trade or business.

A taxpayer may not be eligible for payments under section 6427(e) under certain circumstances. The eligibility requirements for a payment under section 6427(e) are dictated under section 6427(k). Generally, section 6427(k) provides that the entities eligible to receive payments for fuel tax credits are those entities not subject to federal income taxes. There are two exceptions to this rule: (1) taxpayers with aggregate quarterly fuel excise tax liabilities of at least $750; and (2) a claim filed for fuel mixtures or alternative fuels for any period that is not less than one week and is $200 or more. These claims must be filed on or before the last day of the first quarter following the earliest quarter in the claim.

Taxpayers that are not eligible, or do not timely file an allowable claim, for payment under section 6427(e) but otherwise qualify for fuel tax incentives under section 6426 can file a claim for a refundable income tax credit under section 34. To claim a refundable income tax credit under section 34, a taxpayer must file Form 4136, Credit for Federal Tax Paid on Fuels, with the taxpayer’s income tax return. Furthermore, a blender of biodiesel may elect out of the credits and payments under section 6426 and claim a nonrefundable income tax credit under section 40A (biodiesel and renewable diesel used as fuel) as an alternative to payments and credits allowed under sections 6426, 6427 and 34.

Notice 2018-21

Claims for biodiesel and alternative fuels

The time for filing excise tax credit claims for biodiesel and alternative fuels sold or used during 2017 has already past. In order to give taxpayers an opportunity to claim the reinstated tax credits, Notice 2018-21 provides the procedures for making a one-time claim for credits and payments authorized by sections 6426(c), 6426(d) and 6427(e) for 2017:

  1. Submit claims for 2017 biodiesel and alternative fuel incentives on Form 8849, Claim for Refund of Excise Taxes.
  2. Include Form 8849, Schedule 3, Certain Fuel Mixtures and the Alternative Fuel Credit, with the submission and enter amounts for 2017 biodiesel and alternative fuel incentives on Lines 2 and 3 of Schedule 3.
  3. Follow the instructions to Form 8849 and Schedule 3 when preparing the submission to the extent the instructions do not conflict with the notice.
  4. Claim all 2017 biodiesel and alternative fuel incentives for which the taxpayer is eligible on a single Form 8849.
  5. Mail the submission to the address listed for Schedule 3 in the instructions to Form 8849 under Where to File. Taxpayers may also electronically file Form 8849 and Schedule 3 through any electronic return system that participates in the IRS e-file program for excise taxes.
  6. Taxpayers must be registered by the IRS via Form 637 to claim a credit for an alternative fuel or alternative fuel mixture.
  7. Taxpayers must maintain adequate record to substantiate eligibility for the 2017 biodiesel and alternative fuel incentives.
  8.  Claim period and due date for biodiesel and alternative fuel incentives

There is a 180-day claim period for 2017 biodiesel and alternative fuel incentives. The claim period begins on April 2, 2018 (claims submitted before this date will be treated as filed April 2, 2018), and all claims must be filed on or before Sept. 29, 2018. If the IRS does not pay the 2017 biodiesel and alternative fuel incentive claims within 60 days after the claim is received, then the IRS will play the claim with interest as of the filing date and using the overpayment rate provided under section 6621.

Claims for the alternative fuel mixture credit

In order to claim a credit for alternative fuel mixtures sold or used in 2017 a taxpayer must comply with the following procedures:

  1. For 2017 all claims for the alternative fuel mixture credit under section 6426(e) must be made on Form 720X, Amended Quarterly Federal Excise Tax Return.
  2. Taxpayers must enter amounts for their 2017 alternative mixture credit claims on Line 2 of Form 720X. Further, taxpayers must identify the type and amount of alternative fuel in the mixture for which they are claiming the alternative fuel mixture credit on Line 6 of Form 720X.
  3. Taxpayers must follow the Form 720X instructions when preparing their submission to the extent the instructions do not conflict with the notice.
  4. Mail the submission to the address listed in the instructions to Form 720X under Where to File. Taxpayers may also electronically file Form 720X through any electronic return system that participates in the IRS e-file program for excise taxes.
  5. Taxpayers must be registered by the IRS via Form 637 to claim a credit for an alternative fuel or alternative fuel mixture.
  6. Taxpayers’ claims for the alternative fuel mixture credit cannot exceed their section 4081 liability for the quarter in which the credit is being claimed.
  7. Taxpayers must maintain adequate record to substantiate eligibility for the 2017 alternative fuel mixture credits.
  8. Taxpayers that fail to file a Form 720, Quarterly Federal Excise Tax Return, and remit the section 4081 tax due for any quarter in 2017 before submitting a claim allowed under section 6426(e) on Form 720X will experience a delay in the processing of the claim and related payment.

Claim period and due date for the alternative fuel mixture credit

The claim period for the 2017 alternative fuel mixture credit begins April 2, 2018. Claims submitted before this date will be treated as filed on April 2, 2018. Generally, claims for the alternative fuel mixture credit 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.

Claims not affected by the notice

The notice does not affect the following claims for 2017:

  • Nonrefundable income tax credits under section 40(b)(6) for second generation biofuel producers; taxpayers should continue to submit these claims for 2017 on Form 6478, Biofuel Producer Credit.
  • Nonrefundable income tax credits under section 40A(b)(1) for biodiesel mixtures, section 40A(b)(2) for biodiesel (including renewable diesel), and section 40A(b)(4) for the small agri-biodiesel producer credit; taxpayers should continue to submit these claims for 2017 on Form 8864, Biodiesel and Renewable Diesel Fuels Credit.
  • Refundable income tax credits under section 34 for biodiesel mixtures or alternative fuels; taxpayers should continue to submit these claims for 2017 on Form 4136, Credit for Federal Tax Paid on Fuels.

Conclusion

The Code provisions that authorize credits and payments under sections 6426(c), 6426(d), 6426(e) and 6427(e) expired for sales and uses after Dec. 31, 2016. The Bipartisan Budget Act of 2018 reinstated the expired provisions authorizing these credits and payments through Dec. 31. 2017.

Notice 2018-21 provides the procedures taxpayers are required to use to claim the biodiesel and alternative fuel incentives for 2017. Taxpayers who filed protective or anticipatory claims during 2017 for payments and credits covered by this notice should refile their claims pursuant to the rules and procedures prescribed in the notice. The IRS will not treat as perfected any protective or anticipatory claims previously filed with the IRS that are not in accordance with the rules and procedures contained in the notice.

Taxpayers who think they might be eligible for biodiesel or alternative fuel tax incentives should contact their tax advisors to ensure that all rules and registration requirements are being complied with to obtain the credit.

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