US tax credits for biodiesel mixtures can provide significant tax advantages for producers that understand and properly follow the regulations, which continue to be in effect through Dec. 31, 2008.1 US refiners should understand these benefits if and when they blend biodiesel into final fuel products.
Currently, an income tax credit of $1/gal for agricultural biodiesel (agri-biodiesel) and 50¢/gal of biodiesel is available to producers of biodiesel mixtures.
The American Jobs Creation Act signed by Pres. George W. Bush in 2004 established a federal tax credit for production of biodiesel fuel and biodiesel fuel mixtures produced after Dec. 31, 2004. According to the Internal Revenue Code, producers of biodiesel mixtures are able to receive a payment from the US Treasury for any biodiesel credits earned in excess of the excise tax attributable to the biodiesel mixture set forth on a quarterly return.
Biodiesel is a diesel-equivalent, processed fuel derived from biological sources, divided into two categories by the Internal Revenue Code: biodiesel and agri-biodiesel. Agri-biodiesel is distinguished from biodiesel in the code and refers to a special type of biodiesel derived solely from virgin oils, including esters derived from virgin vegetable oils from corn, soybeans, other plant matter, and animal fats.
The use of agri-biodiesel in biodiesel fuel mixtures yields a $1/gal tax credit compared with a 50¢/gal credit for regular biodiesel.
Biodiesel mixture credit
A producer of a biodiesel mixture can make a claim for the biodiesel used to make the mixture itself.1 To receive the credit, the producer must make a “qualified biodiesel mixture,” which is a mixture of biodiesel and diesel fuel determined without regard to any use of kerosine.1
The producer may only claim the credit if it sells or uses this mixture it has produced.1 The credit applies to each gallon of biodiesel used to produce the mixture, but only if the mixture is sold by the blender for use as a fuel or is used in the producer’s trade or business.1
Example: If a refiner uses 1,000 gal of biodiesel to produce 5,000 gal of a qualified biodiesel fuel mixture, that refiner will be entitled to a biodiesel mixture credit of $500 (1,000 gal x 50¢/gal). If the refiner had used agri-biodiesel, the credit would be $1,000 (1,000 gal x $1/gal).
The taxpayer may claim the biodiesel mixture credit on a quarterly basis and produce a Certificate for Biodiesel in order to make a claim.
Section 6426 allows a credit against the excise tax imposed on taxable fuel for blenders of biodiesel that qualify for the biodiesel mixture credit. To the extent that the taxpayer’s biodiesel mixture credit exceeds that taxpayer’s excise tax liability for any particular quarter, the blender may request an income tax credit or a payment from the IRS.1
Each request must include:
- The amount of agri-biodiesel and biodiesel in the biodiesel mixture.
- A copy of a Certificate for Biodiesel.
- A statement by the claimant that it has no reason to believe information contained in the certificate is false.
The IRS also requires that any producer of a taxable fuel mixture containing biodiesel must register as such with the IRS to claim the biodiesel mixture credit. Additionally, producers of biodiesel mixtures can receive a payment from the US Treasury for any biodiesel credits earned in excess of the excise tax attributable to the biodiesel mixture set forth on a quarterly return.
One must only register as a blender if the taxpayer’s mixture produces a taxable fuel. If a taxable fuel is not produced, then no blender registration is required.
To claim the biodiesel mixture credit, and any corresponding payments for credits that exceed excise tax liability, the producer of the mixture must obtain a Certificate for Biodiesel from the biodiesel producer. The certificate must identify the product produced and percentage of biodiesel and agri-biodiesel in the product.2
The biodiesel mixture credits and excise tax operate independently of each other. This means that a blender of biodiesel fuel can take advantage of the biodiesel credit even if it has not paid any excise taxes for taxable fuel.
If a refiner, for example, mixed and sold a blended biodiesel mixture that contained less than 4% normal paraffins (an excluded liquid), it would not have to pay excise tax on the biodiesel used to create that liquid. The refiner would, nevertheless, be able to claim the biodiesel mixture credit for any biodiesel used in the mixture.
‘Taxable fuel’
The excise tax on taxable fuel may apply to the biodiesel contained in the biodiesel mixture.
Pure biodiesel, because it contains more than 4% normal paraffins, is not considered a taxable fuel. Section 4081(a)(1) imposes a tax on certain removals and sales of taxable fuels. Section 4083 defines taxable fuel as diesel fuel, gasoline, and kerosine. Treasury Regulations define diesel fuel as any liquid that, without further processing or blending, is suitable for use as a fuel in a diesel-powered highway vehicle or train.3
The definition of diesel fuel does not, however, include “excluded liquid.”3 The definition of excluded liquid includes any liquid that contains less than 4% normal paraffins.3 Mentioned previously, although biodiesel is suitable for use as a fuel in a diesel-powered highway vehicle, it contains less than 4% normal paraffins and is therefore an excluded liquid and not subject to excise tax.
If biodiesel, however, is used in the production of blended taxable fuel, a tax is imposed on the removal or sale of the blended taxable fuel containing the biodiesel.4 The tax is computed on the difference between the total number of gallons of blended taxable fuel and the number of gallons of previously taxed taxable fuel used to produce that blended taxable fuel.3
If 800 gal, for example, of taxable diesel fuel is added to 200 gal of previously untaxed biodiesel to create 1,000 gal of B20 biodiesel fuel, an excise tax will be imposed on the 200 gal of biodiesel used to create the mixture. The biodiesel used in the mixture is taxable because B20 biodiesel fuel exceeds the 4% normal paraffins base and, therefore, is not an excluded liquid, but a taxable fuel.
A discussion of when the excise tax rate is applied (i.e., at what stage of the process) is beyond the scope of this article.
The IRS has published no guide for when a biodiesel mixture ceases to be an excluded liquid because it contains less than 4% normal paraffins. The test for the amount of normal paraffins contained in the liquid was originally meant to apply to mineral spirits, not biodiesel, but has nevertheless been applied to biodiesel.4
B20 is considered a blended taxable fuel and does contain more than 4% normal paraffins.5 The IRS, however, has published no guide for what concentration of biodiesel to diesel fuel will cause a liquid to become a blended taxable fuel.
The IRS has recently released guidance regarding the biodiesel mixture credit as to what constitutes a qualified biodiesel mixture. Notice 2005-62 notes that the mixture must contain at least 0.1 vol % of diesel fuel. This means, for example, that a mixture of 999 gal of biodiesel and 1 gal of diesel fuel would qualify for the credit.
The biodiesel mixture credit is an opportunity for biodiesel blenders and refiners to reduce the excise taxes imposed on the fuel and possibly receive a payment from the IRS in the event the credit exceeds any excise taxes.
While financial incentives can be significant, biodiesel producers need to consult with their tax and legal advisors to ensure proper application of the regulations and requirements.
References
- American Jobs Creation Act of 2004.
- American Jobs Creation Act of 2004, Notice 2005-4, 2005-62.
- Treasury Regulation, Section 48.4081, US Treasury, Washington, DC.
- Treasury Regulation, Section 48.4081, Revenue Rule 2002-76, US Treasury, Washington, DC, 2002.
- Telephone conference with Susan Athy, Attorney-Advisor, Department of the Treasury, Internal Revenue Service, Nov. 20, 2006.
The author
Jesse Bassett ([email protected]) is an associate with the law firm of Fitzgerald, Abbott & Beardsley, Oakland, Calif., where he practices in the tax group. His tax practice encompasses several areas of federal, state, and local tax law relevant to business taxation and tax planning. He holds a JD from the University of California, Davis, School of Law and an LLM in taxation from the University of San Diego. He is a member of the state bars of California and Nevada as well as a member of the taxation section of the California Bar.