Biodiesel Fuel Credit | AndreTaxCo, PLLC

Federal Tax Incentives:

Biodiesel Fuel Credit § 40A

Background

The Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as part of the Further Consolidated Appropriations Act, 2020, retroactively extended certain biodiesel fuel tax benefits through at least the end of 2020. In addition, the Act extended the excise tax credits and payments for biodiesel mixtures through December 31, 2022, and for alternative fuels through December 31, 2020. This includes the IRC § 40A biodiesel and renewable diesel fuels credit which is retroactively extended for fuel sold or used in calendar years 2018 through 2022. See IRC § 40A(g).

Section 13201 of the Inflation Reduction Act of 2022 (IRA), Pub. L. 117-169 (August 16, 2022), further amended the IRC § 45A credit. The IRA extends the $0.10 or $1.00 per gallon biodiesel fuels tax credit under IRC § 40A for Small Agri-Biodiesel, Biodiesel, or Renewable Diesel from December 31, 2022 through December 31, 2024.

The Biodiesel Mixture or Renewable Diesel Mixture portions of the credit may also be claimed as an excise tax credit. The IRA also extends the $1.00 per gallon biodiesel mixture excise tax credit under IRC § 6426(c) for the production of biodiesel mixture sold or used in a trade or business from December 31, 2022 through December 31, 2024.

In general, the Biodiesel Fuels Credit determined under IRC § 40A(a) for the taxable year is an income tax and excise tax credit incentive for fuels containing biodiesel and is the aggregation of three credits listed below.

(1) IRC § 40A(a)(1) — the Biodiesel Mixture (Renewable Diesel Mixture) Credit (aka "blender credit"),
- The biodiesel mixture ("blender") credit is $1.00 per gallon for biodiesel mixed with petroleum diesel fuel and may be claimed as an immediate excise tax credit against the blender’s motor and aviation fuels excise taxes. Credits in excess of excise tax liability may be refunded. It may apply generally to any blended biodiesel, subject to additional rules and regulations.
(2) IRC § 40A(a)(2) — the Biodiesel (Renewable Diesel) Credit (aka "producer credit"), plus
- The biodiesel credit is $1.00 for each gallon of pure biodiesel and may be claimed as income tax credits.
(3) IRC § 40A(a)(3) — the Small Agri-Biodiesel Producer Credit (aka "small producer credit") in the case of an eligible small agri-biodiesel producer.
- The small agribiodiesel producer credit is an additional credit of 10 cents per gallon for up to 15 million gallons when agri-biodiesel production capacity did not exceed 60 million gallons per year and may be claimed as income tax credits.

In general, the eligible tax credits derived under IRC § 40A consist of the following types of fuels:

Biodiesel: a cleaner-burning renewable replacement for petroleum diesel fuel. It can be manufactured from vegetable oils, animal fats, or recycled restaurant grease.
Renewable biodiesel: derived from biomass (e.g. any organic material other than oil, gas, or coal) and is treated the same as biodiesel for tax purposes.
Agri-biodiesel: comes solely from virgin oils (soybean, corn, sunflower seed, cotton seeds, canola, etc.) or animal fats.

Overlapping Incentives Limitation: Fuels eligible for the Biodiesel Mixture excise tax credit or the income tax credits under IRC § 40A (or IRC § 40B Sustainable Aviation Fuels Credit) are not eligible for the Alternative Fuels or Alternative Fuels Mixture excise tax credits under IRC §§ 6426(d)-(e), 6427(e). Moreover, fuel eligible for the IRC § 40 credit (Second Generation Biofuel Producer Credit) is not eligible for the credits under IRC §§ 40A, 6426.

For additional details providing summary background information on each type of biodiesel fuel credit under IRC § 40A as noted above, see below.

Biodiesel (Renewable Diesel Mixture) Mixture Credit

The biodiesel or renewable diesel reported for the credit must be used to make a qualified mixture. A qualified mixture combines biodiesel or renewable diesel with diesel fuel, determined without regard to any use of kerosene. However, treat the kerosene as diesel fuel when figuring a renewable diesel mixture credit for certain aviation fuel. The producer of the biodiesel or renewable diesel mixture must either:

Used it as fuel, or
Sold it as fuel to another person.

The credit is available only to the producer of the mixture. The producer must use or sell the mixture in a trade or business and the credit is available only for the year the mixture is sold or used. See IRC § 40A(b)(1)(C).The credit is not allowed for casual off-farm production of a qualified mixture. See IRC § 40A(b)(1)(D)

Note, you may be liable for a 24.4 cents per gallon excise tax on biodiesel or renewable diesel used to produce blended taxable fuel outside the bulk transfer terminal system if the mixture is diesel fuel. Report the tax liability on Form 720, Quarterly Federal Excise Tax Return on the line for IRS No. 60(c) for the quarter in which the mixture was sold or used.

A biodiesel blender (producer) that is registered with the Internal Revenue Service (IRS) may be eligible for a tax incentive in the amount of $1.00 per gallon of pure biodiesel, agri-biodiesel, or renewable diesel blended with petroleum diesel to produce a mixture containing at least 0.1% diesel fuel. The incentive must first be taken as a credit against the blender's fuel tax liability. However, any excess over this tax liability may be claimed as a direct payment from the IRS.

Claims must generally include a copy of the certificate from the registered biodiesel producer or importer that:

identifies the product;
specifies the product's biodiesel, agri-biodiesel, and/or renewable diesel content;
confirms the product is properly registered as a fuel with the U.S. Environmental Protection Agency (EPA); and
confirms the product meets the requirements of American Society of Testing and Materials (ASTM) specification D6751.

Renewable diesel is defined as liquid fuel derived from biomass that meets EPA's fuel registration requirements and ASTM specifications D975 or D396. The definition of renewable diesel does not include any fuel derived from co-processing biomass with a feedstock that is not biomass.

Biodiesel (Renewable Diesel) Credit

A taxpayer that delivers pure, unblended biodiesel (B100) into the tank of a vehicle or uses B100 as an on-road fuel in their trade or business may be eligible for a tax incentive in the amount of $1.00 per gallon of biodiesel, agri-biodiesel, or renewable diesel.

Renewable diesel is defined as liquid fuel derived from biomass that meets EPA's fuel registration requirements and ASTM specifications D975 or D396. However, the definition of renewable diesel does not include any fuel derived from co-processing biomass with a feedstock that is not biomass.

The biodiesel or renewable diesel reported must not be a mixture. If the biodiesel was sold at retail, only the person that sold the fuel and placed it into the tank of the vehicle is eligible for the tax credit. See IRC § 40A(b)(2)(B). The incentive is allowed as a credit against the taxpayer's income tax liability.

In general, biodiesel (renewable diesel) credits are for biodiesel or renewable diesel which during the tax year you:

Used as a fuel in a trade or business, or that person's vehicle.
However, no credit is allowed for fuel used in a trade or business that was purchased in a retail sale.

Pursuant to IRC § 40A(b)(3), biodiesel (renewable diesel) credit claims must generally include a copy of the certificate from the registered biodiesel producer or importer that:

identifies the product;
specifies the product's biodiesel, agri-biodiesel, and/or renewable diesel content;
confirms the product is properly registered as a fuel with the U.S. Environmental Protection Agency (EPA); and
confirms the product meets the requirements of American Society of Testing and Materials (ASTM) specification D6751.

Note, you may be liable for a 24.4 cents per gallon excise tax on biodiesel or renewable diesel (see IRC § 4081(a)(2)(A)(iii)) you sold (in your trade or business) for use or used in a diesel-powered highway vehicle or diesel-powered train. Report the tax liability on Form 720 on the line for IRS No. 79 for the quarter in which the biodiesel was sold or used, or IRS No. 60(b) for the quarter in which the renewable diesel was sold or used.

Small Agri-Biodiesel Producer Tax Credit

As stated above, the Small Agri-Biodiesel Producer Tax Credit incentive originally expired on December 31, 2017, but was retroactively extended through December 31, 2020, by Public Law 116-94.

A small agri-biodiesel producer that is registered with the Internal Revenue Service (IRS) may be eligible for a tax incentive in the amount of $0.10 per gallon of agri-biodiesel. However, "renewable diesel" does NOT qualify for the Small Agri-Biodiesel Producer Tax Credit.

The incentive applies only to the first 15 million gallons (see IRC § 40A(b)(4)(C)) of qualified agri-biodiesel which is produced by an eligible small agri-biodiesel producer in a tax year is allowed as a credit against the producer's income tax liability, and which during the tax year is (see IRC § 40A(b)(4)(B)(i)):

sold and used by the purchaser in the purchaser's trade or business to produce an agri-biodiesel and diesel fuel mixture (other than casual off-farm production);
sold and used by the purchaser as a fuel in a trade or business;
sold at retail for use as a motor vehicle fuel;
- e.g. sells such agri-biodiesel at retail to another person and places such agri-biodiesel in the fuel tank of such other person
used by the producer in a trade or business to produce an agri-biodiesel and diesel fuel mixture; or
used by the producer as a fuel in a trade or business.

IRC § 40A(e)(1) defines the term “eligible small agri-biodiesel producer” means a person who, at all times during the taxable year, has a productive capacity for agri-biodiesel not in excess of 60,000,000 gallons. IRC § 40A(d)(2) provides "Agri-biodiesel" is defined as diesel fuel derived from the following:

solely from virgin oils, including esters derived from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds, rice bran, mustard seeds, and camelina, and from animal fats.

Certification

To claim a credit, you generally must attach the Certificate for Biodiesel and, if applicable, Statement of Biodiesel Reseller (e.g. see Notice 2005-62), to Form 8864. To claim a credit, the certificate must generally indicate at all appropriate locations that the fuel to which it relates is renewable diesel and state that the fuel meets the applicable requirements.

However, if the certificate or statement was attached to a previously filed claim, attach a statement with the
following information.

Certificate identification number.
Total gallons of agri-biodiesel, biodiesel other than agri-biodiesel, or renewable diesel on the certificate.
Total gallons claimed on Schedule 3 (Form 8849, Claim for Refund of Excise Taxes), Certain Fuel Mixtures and the Alternative Fuel Credit.
Total gallons claimed on Form 720, Quarterly Federal Excise Tax Return, Schedule C.
Total gallons claimed on Form 4136, Credit for Federal Tax Paid on Fuels.
See Notice 2005-62, 2005-35 I.R.B. 443, or Pub. 510, Excise Taxes, for the model certificate and statement.

Note, all producers and importers of biodiesel or renewable diesel and all persons producing blended taxable fuel must generally be registered with the IRS to be eligible for certain applicable tax benefits. See Form 637, Application for Registration.

Coordination With Excise Tax Credit

Only one credit may be taken with respect to any amount of biodiesel or renewable diesel. If any amount is claimed (or will be claimed) with respect to any amount of biodiesel or renewable diesel on Form 720, Form 8849,
Claim for Refund of Excise Taxes, or Form 4136, then a claim generally cannot be made on Form 8864 for that amount of biodiesel or renewable diesel.

Specifically, IRC § 40A(c) states the amount of the credit determined under IRC § 40A with respect to any biodiesel shall be properly reduced to take into account any benefit provided with respect to such biodiesel solely by reason of the application of section IRC § 6426 or IRC § 6427(e).

Recapture of Credit

In general, you may be required to pay a tax (recapture) on each gallon of biodiesel or renewable diesel on which a credit was claimed at the rate used to figure the credit if you:

Use it (including a mixture) other than as a fuel,
Buy it at retail and use it to create a mixture,
Separate it from a mixture, or
Use agri-biodiesel on which the small agri-biodiesel producer credit was claimed for a use not described under Qualified Agri-Biodiesel Production, earlier.

As such, for the quarter in which any of the above apply, you may be required to report the tax on Form 720, Part II, IRS No. 117.

IRS Links, Notices, & Filing Requirements

Need more details? Contact us

We are here to assist. Contact us by phone, email or via our Social Media channels.