United States

IRS issues clarifying guidance on treatment of fuel excise tax credits


In a series of Chief Counsel Advice (CCA) memorandums, the IRS has clarified the ancillary treatment of fuel excise tax credits for tax purposes, specifically addressing whether the excise tax credits are includable in gross income and whether such credits affect the amount of the taxpayer’s excise tax expense deduction. These memorandums are applicable to alcohol fuel mixture, biodiesel mixture, alternative fuel, and alternative fuel mixture credits described in sections 6426(b), (c), (d) and (e). As discussed below, these CCA memorandums should be consulted together in order to understand the proper income tax treatment of certain fuel tax credits in an otherwise confusing area of tax law.  

In August 2013, CCA 201342010 was released, which concluded that biodiesel blenders’ excise tax credits under section 6426(c) and payments under section 6427(e) are not items of gross income for taxpayers that claim such credits or receive such payments. This contrasts with the methodology applicable to taxpayers who elect to claim the section 40A income tax credit (as opposed to the section 6426 excise tax credit), who must include the amount of the credit in gross income. The CCA cites Congressional intent and express language in the law for the difference in treatment between the excise tax credit/payment and the income tax credit.

CCA 201342010 caused some confusion because the guidance did not differentiate between section 6426 tax credits that reduce current excise tax liability (or excise taxes previously paid) and section 6426 tax credits in excess of excise tax liability, which are refunded as section 6427(e) payments. To address this uncertainty, the IRS released CCA 201406001. The new guidance provides that taxpayers that claim a biodiesel fuel excise tax credit must first apply such credit against the excise taxes levied on such fuel under section 4081 or on the removal, entry or sale of such fuel under section 4041. Citing Rev. Rul. 79-315 and prior Chief Counsel Advice memorandums in analogous situations where state tax credits (which are not included in gross income) reduce the amount of deductible state taxes for federal income tax purposes, the guidance provides that excise tax credits that reduce excise tax liability should reduce the excise tax expense that would otherwise be recorded in cost of goods sold or operating expenses. Based on CCA 201342010, only the tax credit in excess of the excise tax liability that is refunded as a payment under section 6427(e) should be excluded from gross income.

For example, assume a taxpayer has calculated an $80 biodiesel fuel excise tax credit, which is applied against the taxpayer’s $100 excise tax liability. This results in a net $20 excise tax liability for the taxpayer after a dollar-for-dollar reduction in excise tax liability offset by the excise tax credit. When calculating its deduction for excise taxes for purposes of cost of goods sold or ordinary operating expenses, the taxpayer will be allowed a $20 deduction for excise taxes paid throughout the year.

Alternatively, if the excise tax credit was $120, $100 would offset the excise tax liability, the excess credit of $20 would be excluded from gross income, and the taxpayer would not have a deduction for excise taxes.

It should be noted that many of the excise tax credits for fuels and fuel mixtures expired on Dec. 31, 2013. However, taxpayers still have time to take advantage of the favorable advice handed down by the IRS Chief Counsel’s office regarding these credits. Specifically, taxpayers that previously included in gross income the refunds paid under section 6427(e) should consult their tax advisors to determine whether it may be possible to amend previously filed income tax returns.

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