IRS asserts fuel tax credits must be included in income if they would offset liability

Tax Hot Topics: Fuel tax creditsThe IRS has issued guidance (Notice 2015-56) requiring taxpayers who claimed alternative fuel and biodiesel mixture credits in 2014 to include the credits in income to the extent they would have reduced any actual fuel tax liability.

The biodiesel mixture credit provides a $1 per gallon credit for the use of qualifying biodiesel in fuel mixtures, while the alternative fuel credit provides a 50 cents per gallon credit for the use or sale of alternative fuels such as propane. Generally, the credits must first be used to reduce fuel excise tax liability, while any excess credits can be taken as either a refundable payment or a refundable income tax credit. A 2013 IRS Chief Counsel Advice memorandum (CCA 2013-42-010) held that when a taxpayer has no fuel tax liability, a refundable credit does not need to be included in income or reduce the deduction for fuel expense. However, the IRS has made clear in separate advice (CCA 2014-06-001) that when a credit is first used to reduce actual excise tax liability, the taxpayer must reduce its deduction for that tax liability or include the credit in income.

In 2014, the biodiesel mixture and alternative fuel credits weren’t extended until December, so taxpayers weren’t able to use the credits to offset their fuel tax liability on their quarterly excise tax forms (Form 720). When the credits were reinstated retroactively, the IRS allowed taxpayers to claim the credits as payments on Form 8849 instead of amending their Form 720 and claiming a refund for reduced liability. Notice 2015-56 maintains that even though taxpayers weren’t required to amend their excise tax returns to reduce excise tax, they should still treat the credit as if it reduced their liability. The notice therefore requires taxpayers to include the credits in income to the extent the credits would have offset excise tax liability, or decrease their cost of goods sold by this amount.

The notice applies only to 2014 claims but reinforces the IRS position that these refundable fuel credits should first be considered a reduction in excise tax liability that reduces the deduction for excise tax or is included in income. Some taxpayers are challenging this position, and the issue is likely to be resolved by the courts. The notice doesn’t affect credits for which the taxpayer had no fuel tax liability.

David Auclair
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Dustin Stamper
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