Publication 378 Fuel Tax Credits and Refunds

1. Fuels

The American Jobs Creation Act of 2004 (the Act), Public Law 108-357, made changes affecting fuel tax credits and refunds. The following is a brief review of some of these changes.

The credits and refunds for the nontaxable use of gasohol and, generally, the use of gasoline taxed at the full rate to produce gasohol have been eliminated.

Credit for Alcohol Fuel Mixtures and Biodiesel (Including Agri-biodiesel) Mixtures. The Act allows two new credits against any fuel tax liability reported on Form 720:

Claims for Aviation-grade kerosene sold for use on a farm or for use by state and local governments can only be made by the registered ultimate vendor.

Credits and refunds can be made to certain registered ultimate vendors if the ultimate purchaser waives its right to a claim for credit or refund as follows.

Aviation-grade kerosene sold for nontaxable uses (other than use on a farm or use by state and local governments).

Gasoline and aviation gasoline sold to state and local governments and nonprofit educational organizations.

Undyed diesel fuel or undyed kerosene sold for use by certain intercity and local buses.

Refunds to gasoline wholesale distributors have been eliminated for fuel sold after December 31, 2004. Schedule 4 (Form 8849) will not be revised and cannot be used for fuel sold after December 31, 2004.

Definition of off-highway vehicle. The Act provides that a vehicle with certain described features for off-highway transportation is not treated as a highway vehicle. This provision applies to taxable periods after October 22, 2004. Fuel used in mobile machinery in an off-highway business use is limited to an annual claim for taxable years beginning after October 22, 2004.

Additional nontaxable uses of liquefied petroleum gas have been added.

The filled-in forms have been removed. For copies of any forms referenced in this publication, see How To Get Tax Help later.

Introduction

This publication covers federal fuel tax credits you may be able to claim on your income tax return. It also covers fuel tax refunds you may be able to claim during the year.

This publication discusses the following subjects.

You can email us at *taxforms@irs.gov. Please put "Publications Comment" on the subject line.

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Useful Items

You may want to see:

Publication

Federal excise taxes are imposed on certain fuels. This chapter defines the fuels and lists the nontaxable uses of each fuel. The nontaxable uses are defined in Chapter 2.

Type of use table. The nontaxable uses listed under each fuel are from Table 1-1. The first column of the table is the number you enter on Form 4136, Form 8849, or Schedule C (Form 720) for that type of use. For type of use 2, the mobile machinery parenthetical applies only to Form 8849 and Form 720.

 Table 1-1. Type of Use Table

Aviation gasoline means all special grades of gasoline suitable for use in aviation reciprocating engines and covered by ASTM specification D 910 or military specification MIL-G-5572.

Nontaxable Uses

The following are the uses of gasoline for which a credit or refund may be allowable to an ultimate purchaser.

This is a new category of registered ultimate vendor. This is an ultimate vendor that sells gasoline or aviation gasoline to any of the following.

The ultimate vendor must be registered by the IRS. See Publication 510 for a discussion of the registration requirements.

Gasohol Blending

Caution. The credits and refunds for the nontaxable use of gasohol and, generally, the use of gasoline taxed at the full rate to produce gasohol have been eliminated. The new credits for alcohol fuel mixtures and biodiesel mixtures are discussed in Chapter 4, Alcohol Fuel Mixture Credit, and Chapter 5, Biodiesel Mixture Credit.

Undyed Diesel Fuel and Undyed Kerosene (Other Than Aviation-Grade Kerosene)

Diesel fuel means:

An excluded liquid is either of the following.

Kerosene means any of the following liquids.

However, kerosene does not include an excluded liquid, discussed above.

Nontaxable Uses

The following are the uses of undyed diesel fuel and undyed kerosene for which a credit or refund may be allowable to an ultimate purchaser.

Sales by Registered Ultimate Vendors

The following are the sales for which a credit or refund may be allowable to the registered ultimate vendor only.

Registered ultimate vendor (blocked pump). This is an ultimate vendor that sells undyed kerosene from a blocked pump.

A credit or refund may be allowable to a registered ultimate vendor (blocked pump) if the vendor sold to a buyer undyed kerosene from a blocked pump for use other than as a fuel in a diesel-powered highway vehicle and the vendor had no reason to believe the kerosene would not be used in that manner.

Blocked pump. A blocked pump is a fuel pump that meets all the following requirements.

Registered ultimate vendor (blending for cold weather). This is a taxable fuel registrant (discussed in Publication 510), a registered ultimate vendor, or a registered ultimate vendor (blocked pump).

A credit or refund may be allowable to a registered ultimate vendor (blending) if the vendor sold undyed kerosene in an area described in an IRS declaration of extreme cold for the production of a cold weather blend.

Cold weather blend. This is a blend of kerosene and diesel fuel produced in an area described in an IRS declaration of extreme cold and sold for use or used for heating purposes.

Registered ultimate vendor (certain intercity and local buses). This is a new category of registered ultimate vendor. This is an ultimate vendor that sells undyed diesel fuel or undyed kerosene to the ultimate purchaser for use in certain intercity and local buses.

The registered ultimate vendor may make the claim if the ultimate purchaser waives its right to the credit or refund by providing the registered ultimate vendor with a waiver. A sample waiver is included as Model Waiver E in the Appendix on page 19. The registered ultimate vendor must have the waiver at the time the credit or payment is claimed.

Aviation-Grade Kerosene

Aviation-grade kerosene replaces aviation fuel. Aviation-grade kerosene means kerosene-type jet fuel covered by ASTM specification D 1655 or military specification MIL-DTL-5624T (Grade JP-5) or MIL-DTL-83133E (Grade JP-8).

Nontaxable Uses

The following are the uses of aviation-grade kerosene taxed at the full rate for which a credit or refund of the full rate may be allowable to an ultimate purchaser.

A credit or refund may be allowable to an ultimate purchaser of aviation-grade kerosene taxed at the commercial aviation rate and used in foreign trade.

Sales by Registered Ultimate Vendors

The registered ultimate vendor of aviation-grade kerosene may make a claim for a nontaxable use only if the ultimate purchaser waives its right to make a claim by providing the registered ultimate vendor with a waiver. A sample waiver is included as Model Waiver C in the Appendix on page 17. The ultimate vendor must have the waiver at the time the credit or payment is claimed.

A nontaxable use for this purpose means any use that is exempt from the tax imposed under section 4041(c) (other than by reason of a prior imposition of tax) and any use in commercial aviation within the meaning of section 4083(b).

Registered ultimate vendor (farming and state use). This is an ultimate vendor that sells aviation-grade kerosene to any of the following.

Liquefied Petroleum Gas

Liquefied petroleum gas (LPG) includes propane, butane, and pentane, or mixtures of those gases.

Nontaxable Uses

The following are the uses of taxed LPG for which a credit or refund may be allowable to an ultimate purchaser.

This chapter provides definitions of the terms used in Table 1-1 for nontaxable uses. If applicable, the type of use number from Table 1-1 is indicated in each heading.

On a Farm for Farming Purposes (No. 1)

On a farm for farming purposes means fuel used in carrying on a trade or business of farming, on a farm in the United States, and for farming purposes.

Farm. A farm includes livestock, dairy, fish, poultry, fruit, fur-bearing animals, and truck farms, orchards, plantations, ranches, nurseries, ranges, and feed yards for fattening cattle. It also includes structures such as greenhouses used primarily for the raising of agricultural or horticultural commodities. A fish farm is an area where fish are grown or raised -- not merely caught or harvested.

Farming purposes. As an owner, tenant, or operator, you use fuel on a farm for farming purposes if you use it in any of the following ways.

If doubt exists whether the owner, the tenant, or the operator of the farm bought the fuel, determine who bore the cost of the fuel. For example, if the owner of a farm and the tenant equally share the cost of gasoline that is used on a farm for farming purposes, each can claim a credit for the tax on one-half the fuel used.

Custom application of fertilizer and pesticide. The use of fuel in the aerial or other application of fertilizer, pesticides, or other substances is a use of fuel on a farm for farming purposes. In the case of gasoline, you, as the owner, tenant, or operator, may waive your right to be treated as the ultimate purchaser. If you waive your right, the applicator is treated as having used the gasoline on a farm for farming purposes. See Chapter 14 of Pub. 225, Farmer's Tax Guide, for a sample waiver.

To waive your right to be treated as the ultimate purchaser, you must take all the following actions.

The waiver may be a separate document or it may appear on an invoice or another document from the applicator. If the waiver appears on an invoice or other document, it must be printed in a section clearly set off from all other material, and it must be printed in type sufficiently large to put you on notice that you are waiving your right to the credit or refund. If the waiver appears as part of an invoice or other document, it must be signed separately from any other item that requires your signature.

The effective period of the waiver cannot extend beyond your tax year. When the period covered by the waiver extends beyond the applicator's tax year, the applicator can only claim a credit or refund for fuel used in the part of the waiver period included in the applicator's tax year. The applicator must wait until the next tax year to file a claim for fuel used in the rest of the waiver period.

Fuel not used for farming. Fuel is not used on a farm for farming purposes if it is used in any of the following ways.

Off-highway business use means fuel used in a trade or business or in an income-producing activity other than as a fuel in a highway vehicle registered or required to be registered for use on public highways. The terms , "highway vehicle", "public highway", and "registered" are defined below. Do not consider any use in a boat as an off-highway business use.

Off-highway business use includes fuels used in any of the following ways.

Example. Caroline owns a landscaping business. She uses power lawn mowers and chain saws in her business. The gasoline used in the power lawn mowers and chain saws qualifies as fuel used in an off-highway business use. The gasoline used in her personal lawn mower at home does not qualify.

Highway vehicle. A highway vehicle is any self-propelled vehicle designed to carry a load over public highways, whether or not it is also designed to perform other functions. Examples of vehicles designed to carry a load over public highways are passenger automobiles, motorcycles, buses, and highway-type trucks and truck tractors. A vehicle is a highway vehicle even though the vehicle's design allows it to perform a highway transportation function for only one of the following.

Registered. A vehicle is considered registered when it is registered or required to be registered for highway use under the law of any state, the District of Columbia, or any foreign country in which it is operated or situated. Any highway vehicle operated under a dealer's tag, license, or permit is considered registered. A highway vehicle is not considered registered solely because a special permit allows the vehicle to be operated at particular times and under specified conditions.

Dual use of propulsion motor. Off-highway business use does not include any fuel used in the propulsion motor of a registered highway vehicle even though that motor also operates special equipment by means of a power take-off or power transfer. It does not matter if the special equipment is mounted on the vehicle.

Example. The motor of a registered concrete-mixer truck operates both the engine and the mixing unit by means of a power take-off. The fuel used in the motor to run the mixer is not off-highway business use.

Use in separate motor. Off-highway business use includes fuel used in a separate motor to operate special equipment, such as a refrigeration unit, pump, generator, or mixing unit. If you draw fuel from the same tank that supplies fuel to the propulsion motor, you must figure the quantity used in the separate motor operating the special equipment. You may make a reasonable estimate based on your operating experience and supported by your records.

You can use devices that measure the miles the vehicle has traveled (such as hubometers) to figure the gallons of fuel used to propel the vehicle. Add to this amount the fuel consumed while idling or warming up the motor before propelling the vehicle. The difference between your total fuel used and the fuel used to propel the vehicle is the fuel used in the separate motor.

Example. Hazel owns a refrigerated truck. It has a separate motor for the refrigeration unit. The same tank supplies both motors. Using the truck's hubometer, Hazel figures that 90% of the fuel was used to propel the truck. Therefore, 10% of the fuel is used in an off-highway business use.

Fuel lost or destroyed. You cannot treat fuel lost or destroyed through spillage, fire, or other casualty as fuel used in an off-highway business use.

Export (No. 3)

Export means fuel removed from the United States with the intention that the fuel remain in a foreign country or possession of the United States. Fuel is not exported if it is in the fuel supply tank of a vehicle or aircraft.

In a Boat Engaged in Commercial Fishing (No. 4)

In a boat engaged in commercial fishing means fuel used in taking, catching, processing, or transporting fish, shellfish, or other aquatic life for commercial purposes, such as selling or processing the catch, on a specific trip basis. They include boats used in both fresh and salt water fishing. They do not include boats used for both sport fishing and commercial fishing on the same trip.

Buses

In Certain Intercity and Local Buses (No. 5)

In certain intercity and local buses means fuel used in a bus engaged in furnishing (for compensation) passenger land transportation available to the general public. The bus must be engaged in one of the following activities.

For Diesel Fuel or Kerosene in a Qualified Local Bus (No. 6)

In a qualified local bus means fuel used in a bus meeting all the following requirements.

Under contract. A bus is under contract with a state or local government only if the contract imposes a bona fide obligation on the bus operator to furnish the transportation.

More than a nominal subsidy. A subsidy is more than nominal if it is reasonably expected to exceed an amount equal to 3 cents multiplied by the number of gallons of fuel used in buses on subsidized routes. A company that operates its buses along subsidized and unsubsidized intracity routes may consider its buses qualified local buses only when the buses are used on the subsidized intracity routes.

In a School Bus (No. 7)

In a school bus means fuel used in a bus engaged in the transportation of students or employees of schools. A school is an educational organization with a regular faculty and curriculum and a regularly enrolled body of students who attend the place where the educational activities occur.

For Diesel Fuel and Kerosene (Other Than Aviation-Grade Kerosene) Used Other Than as a Fuel (No. 8)

Diesel fuel and kerosene (other than aviation grade kerosene) used other than as a fuel in the propulsion engine of a diesel-powered highway vehicle or diesel-powered train (not including off-highway business use), means undyed diesel fuel and undyed kerosene used in the following ways:

In foreign trade means fuel used in civil aircraft employed in foreign trade or trade between the United States and any of its possessions. In the case of aircraft registered in a foreign country, the country must allow reciprocal benefits for aircraft registered in the United States.

Certain Helicopter and Fixed-Wing Air Ambulance Uses (No. 10)

Certain helicopter uses. Certain helicopter uses means fuel used by a helicopter for any of the following purposes.

Fixed-wing air ambulance uses. Fixed-wing air ambulance uses means fuel used by a fixed-wing aircraft providing emergency medical services. The aircraft must be equipped for and exclusively dedicated on that flight to acute care emergency medical services.

For Aviation-Grade Kerosene Used Other Than as a Fuel in the Propulsion Engine of an Aircraft (No. 11)

Aviation-grade kerosene used other than as a fuel in the propulsion engine of an aircraft means aviation-grade kerosene used in the following ways.

In a highway vehicle owned by the United States that is not used on a highway means fuel used in a vehicle was not used on public highways during the period covered by the claim. This use applies whether or not the vehicle is registered or required to be registered for highway use.

Exclusive Use by a Nonprofit Educational Organization (No. 13)

Exclusive use by a nonprofit educational organization means fuel used by an organization exempt from income tax under section 501(a) of the Internal Revenue Code that meets both of the following requirements.

Exclusive Use by a State, Political Subdivision of a State, or the District of Columbia (No. 14)

Exclusive use by a state, political subdivision of a state, or the District of Columbia means fuel purchased by the state or local government for its exclusive use. A state or local government is any state, any political subdivision thereof, or the District of Columbia. An Indian tribal government is treated as a state only if the fuel is used in an activity that involves the exercise of an essential tribal government function. Gasoline, diesel fuel, and kerosene used by the American Red Cross is considered to be the use of these fuels by a state.

In an Aircraft or Vehicle Owned by an Aircraft Museum (No. 15)

In an aircraft or vehicle owned by an aircraft museum means fuel used in an aircraft or vehicle that is owned by an organization that meets all the following requirements.

In Military Aircraft (No. 16)

In a military aircraft means fuel used in an aircraft owned by the United States or any foreign nation and constituting a part of its armed forces.

For Use in the Production of Special Fuels (No. 17)

For use in the production of special fuels means used to produce any liquid fuel (including LPG or liquefied natural gas) that is not gas oil, fuel oil, or a product taxable under section 4081.

In Commercial Aviation (Other Than Foreign Trade)

In commercial aviation (other than foreign trade) means fuel used in an aircraft in the business of transporting persons or property by air for compensation or hire. However, commercial aviation does not include any of the following.

Use in a train means fuel used in the propulsion engine of equipment or machinery that rides on rails. This includes use in a locomotive, work train, switching engine, and track maintenance machine.

3. Filing Claims

This chapter tells you how and when to make a claim for a credit or refund of excise taxes on fuels. This chapter also covers recordkeeping requirements, interest and penalty provisions, and when to include the credit or refund in your income.

General Information

Generally, you will provide all the information needed to claim a credit or refund when you properly complete Form 8849, Form 4136, or Form 720 (Schedule C). In some cases, you will have to attach additional information. You need to keep records that support your claim for a credit or refund.

Records. Keep at your principal place of business all records needed to enable the IRS to verify that you are the person entitled to claim a credit or refund and the amount you claimed.

Ultimate purchaser. Ultimate purchasers may make claims for the nontaxable use of fuels on Form 4136, Form 8849 (Schedule 1), and Form 720 (Schedule C) if reporting excise tax liability on that return. If you are an ultimate purchaser, you must keep the following records.

For more information about keeping records, see Publication 583, Starting a Business and Keeping Records, or Publication 552, Recordkeeping for Individuals.

Exceptions.

To make a claim, you must have sold the fuel at a tax-excluded price, repaid the tax to the buyer, or obtained the buyer's written consent to the allowance of the claim. You are required to have a valid certificate or waiver in your possession in order to make the claim.

In addition, you must have a registration number that has not been revoked or suspended. You can get a registration number from the IRS by completing Form 637, Application for Registration (For Certain Excise Tax Activities), and providing the information requested in its instructions.

Farming and state use. To make a claim as an ultimate vendor (farming or state), you must have a UV registration number. If you sell undyed diesel fuel, undyed kerosene, or aviation-grade kerosene for use on a farm for farming purposes or for use by a state or local government, you must keep the following information.

If you operate a business, use your EIN. If you do not have an EIN, you may apply for one online. Go to the IRS website at http://www.irs.gov/businesses/small/ and click on the "Employer ID Numbers (EINs)" link. You may also apply for an EIN by telephone by calling 1-800-829-4933, or you can fax or mail Form SS-4, Application for Employer Identification Number, to the IRS.

Claiming a Refund

Generally, you may claim a refund on Form 8849. Complete and attach to Form 8849 the appropriate Form 8849 schedules. However, if you file Form 720, you can use the Schedule C portion of Form 720 for your refund claims for the quarter. See the Form 720 instructions. Do not claim a refund on Form 8849 for any amount for which you have filed or will file a claim on Schedule C (Form 720) or Form 4136.

Alcohol fuel mixture credits and biodiesel mixture credits must be taken on Schedule C (Form 720) against your taxable fuel liability. To the extent the alcohol fuel mixture credit and biodiesel mixture credit exceed taxable fuel liability, a payment is allowed and may be taken as a credit on Schedule C (Form 720), as a refund on Schedule 3 (Form 8849), or as an income tax credit on Forms 4136, 6478, or 8864 as applicable. Only one claim may be made for any particular amount of alcohol or biodiesel.

Ultimate Purchasers

If you are an ultimate purchaser, you may claim a refund for the excise tax on fuels you purchase and use for a nontaxable use. You may file a claim for refund for any quarter of your tax year for which you can claim at least $750. This amount is the excise tax on all fuels used for a nontaxable use during that quarter or any prior quarter (for which no other claim has been filed) during the tax year.

If you cannot claim at least $750 at the end of a quarter, you carry the amount over to the next quarter of your tax year to determine if you can claim at least $750. If you cannot claim at least $750 at the end of your tax year, you must claim a credit on your income tax return using Form 4136.

Use in mobile machinery. An ultimate purchaser may only make an annual claim for off-highway business use in mobile machinery.

How to file. File the claim for refund by filling out Schedule 1 (Form 8849) and attaching it to Form 8849. Send it to the address shown in the instructions. Only one claim may be filed for a quarter.

Example. You purchased gasoline and undyed diesel fuel. For the first quarter of your tax year, the excise tax on fuel you use for an off-highway business use is $184 for gasoline and $244 for diesel fuel. You cannot file a claim for refund since the total ($428) is less than $750.

For the second quarter, the excise tax on fuel you use for an off-highway business use is $92 for gasoline and $244 for diesel fuel. You add the amount from the first quarter ($428) to the total amount from the second quarter ($336) and determine you can file a claim for refund since the total is $764.

When to file. You must file a quarterly claim by the last day of the first quarter following the last quarter included in the claim. If you do not file a timely refund claim for any quarter of your tax year, you will have to claim a credit for that amount on your income tax return, as discussed earlier.

Generally, an annual claim must be made on Form 4136 (as discussed under Claiming a Credit on Form 4136 later). However, the following must use Schedule 1 (Form 8849) to file an annual claim.

If you are a registered ultimate vendor, you can make a claim for refund of the excise tax on fuel that you sold for certain uses. Complete Form 8849 and Schedule 2 (including line 6 or line 7, if applicable) to make the claim. See Chapter 1. Fuels.

Undyed diesel fuel. You must meet the following requirements for this claim.

Caution. Do not combine this claim with any other claim on Form 8849.

When to file. The claim must be filed by the last day of the first quarter following the earliest quarter included in the claim. If you do not meet the requirements or fail to file a timely quarterly refund claim, you will have to make a claim for a credit on Form 4136.

Claiming a Credit on Form 4136

A credit may be claimed on Form 4136 when you file your income tax return at the end of the year. If you meet certain requirements (discussed earlier), you may be able to make a claim during the year.

Credit only. You can claim the following taxes only as a credit on Form 4136.

When to file. You can claim a fuel tax credit on your income tax return for the year you used the fuel (or sold the fuel in the case of a registered ultimate vendor claims).

Tip. You may be able to make a fuel tax claim on an amended income tax return for the year you used the fuel. Generally you must file an amended return by the later of 3 years from the date you filed your original return or within 2 years from the date you paid the income tax.

How to claim a credit. How you claim a credit depends on whether you are an individual, partnership, corporation, S corporation, or farmers' cooperative association.

Individuals. You claim the credit on the "Other payments from" line of Form 1040. Also check box b on that line. If you would not otherwise have to file an income tax return, you must do so to get a fuel tax credit.

Partnership. Partnerships (other than electing large partnerships) claim the credit by including a statement on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., showing each partners share of the number of gallons of each fuel sold or used for a nontaxable use, the type of use, and the applicable credit per gallon. Each partner claims the credit on his or her income tax return for the partners share of the fuel used by the partnership.

Other entities. Corporations, S corporations, farmers' cooperative associations, and trusts must make the claim on the line for "credit for Federal tax paid on fuels" of the applicable income tax return.

Federal, state, and local governments, and certain tax-exempt organizations (as discussed earlier under Claiming a Refund ) must use Form 8849, not Form 4136, to make an annual claim.

Interest

IRS pays no interest on refunds described in this publication other than refunds to registered ultimate vendors (discussed earlier) not paid within 45 days. Refunds resulting from credits claimed on income tax returns may qualify for interest.

Penalties

There are criminal penalties for false or fraudulent claims. In addition, any person who files a refund claim, discussed earlier, for an excessive amount (without reasonable cause) may have to pay a penalty. An excessive amount is the amount claimed that is more than the allowable amount. The penalty is the greater of two times the excessive amount or $10.

The penalty for failure to register if you are required to register, unless due to reasonable cause, is increased to $10,000 for the initial failure, and then $1,000 each day thereafter you fail to register.

Including the Credit or Refund in Income

Include any credit or refund of excise taxes on fuels in your gross income if you claimed the total cost of the fuel (including the excise taxes) as an expense deduction that reduced your income tax liability.

The year you include a credit or refund in gross income depends on whether you use the cash or an accrual method of accounting.

Cash method. If you use the cash method and file a claim for refund, include the refund amount in your gross income for the tax year in which you receive the refund. If you claim a credit on your income tax return, include the credit amount in gross income for the tax year in which you file Form 4136. If you file an amended return and claim a credit, include the credit amount in gross income for the tax year in which you receive the credit.

Example 1. Sharon Brown, a cash basis farmer, filed her 2004 Form 1040 on March 3, 2005. On her Schedule F, Sharon deducted the total cost of gasoline (including $110 of excise taxes) used on the farm. Then, on Form 4136, Sharon claimed the $110 as a credit. Sharon reports the $110 as additional income on her 2005 Schedule F.

Example 2. March Corporation uses the calendar year as its tax year. For 2004, the following amounts of excise tax were included in the cost of gasoline the corporation used each quarter in a nontaxable use:

  January 1 through March 31        $1,300

Form 8849. March Corporation files quarterly refund claims for the first two quarters (ending March 31 and June 30). It cannot file a quarterly refund claim for the third or fourth quarter because it did not meet the $750 minimum requirement.

Since March Corporation uses the cash method of accounting, the corporation includes $2,400 ($1,300 + $1,100) in its gross income for the tax year in which it receives the refunds (2004).

Form 4136. The corporation claims the remaining amounts ($400 + $300) as a credit on its 2004 income tax return by attaching Form 4136. It files its tax return in 2005. It includes this credit ($700) in its 2005 gross income.

Accrual method. If you use an accrual method, include the amount of credit or refund in gross income for the tax year in which you used the fuels (or sold the fuels if you are a registered ultimate vendor). It does not matter whether you filed for a quarterly refund or claimed the entire amount as a credit.

Example 3. Patty Green uses an accrual method. She files her 2004 return on April 15, 2005. On Schedule C (Form 1040) she deducts the total cost of gasoline (including $155 of excise taxes) used for an off-highway business use during 2004. On Form 4136, Patty claims the $155 as a credit. She reports the $155 as additional income on her 2004 Schedule C.

Example 4. Use the same facts as in Example 2 above, except that March Corporation uses an accrual method of accounting. Since the nontaxable use occurred in 2004, the corporation reports the $3,100 of excise taxes as income on its 2004 income tax return. This consists of the $2,400 it claimed on Form 8849 and the $700 it claimed on Form 4136.

Example

Tyler S. Sands used undyed diesel fuel in vehicles used in his construction business. The vehicles were not registered (or required to be registered) for highway use. In the fourth quarter of his 2004 income tax year, which ends in December, he used 3,000 gallons of undyed diesel fuel. The excise tax on the 3,000 gallons of undyed diesel fuel he used was $732 (24.4 cents per gallon).

Because the tax is less than $750, Tyler must claim a credit for the tax on his 2004 income tax return. He fills out Form 4136 and attaches it to his 2004 income tax return, which he files in 2005. He enters the $732 on line 69 of his Form 1040 and checks box b.

Tyler uses the cash method of accounting. On his 2004 Schedule C (Form 1040), he deducts the total cost of the fuel, including the tax. When Tyler files his 2005 Form 1040, he will include the $732 credit shown on his 2004 Form 4136 as additional income on his Schedule C (Form 1040) for 2005.

Example, continued. For the first two quarters of 2005, Tyler's records show the following.

               Gallons                   Claim

4. Alcohol Fuel Mixture Credit

Beginning January 1, 2005, the procedures for making a claim for most alcohol-blended fuels have been changed. Special rules determine the order in which these claims can be made. Only one claim may be made for any amount of alcohol used to make an alcohol fuel mixture.

Alcohol fuel mixture credit. You can take a credit for the alcohol you use to produce a qualified mixture. A qualified mixture is a mixture of alcohol with gasoline, diesel fuel, or kerosene. You do not treat adding denaturants to alcohol as the production of a mixture.

You, as the producer of the mixture, must either sell the mixture for use as a fuel to another person or use the mixture as a fuel in your trade or business. Take into account alcohol you use to produce a qualified mixture only if the sale or use is in your trade or business.

Alcohol. For purposes of the alcohol fuel mixture credit, alcohol includes methanol and ethanol. It also includes an alcohol gallon of ethyl tertiary butyl ether (ETBE) or other ethers produced from such alcohol and methanol produced from methane gas formed in waste disposal sites. But it does not include any of the following.

Separation or failure to use as fuel. If the credit applied to alcohol used in the production of a qualified mixture, and you later separate the alcohol from the mixture or do not use the mixture as fuel, you must pay a tax equal to the credit. Report this tax on Form 720.

Gasoline tax on the alcohol in an alcohol fuel mixture. Persons who blend alcohol with gasoline, diesel fuel, or kerosene to produce an alcohol fuel mixture outside the bulk transfer terminal system must pay must pay the gasoline tax on the volume of alcohol in the mixture. See Form 720 to report this tax. You also must be registered with the IRS as a blender. See Form 637.

How to claim the credit. Any alcohol mixture credit must first be taken against your taxable fuel liability on Form 720. Any excess credit may be taken on Schedule C (Form 720), Form 8849, Form 4136, or Form 6478. See Notice 2005-4 for more information.

Claiming the excess credit. Instead of waiting until the end of the quarter when you file Form 720 to claim any excess alcohol fuel mixture credit, you may be able to file Form 8849 (Schedule 3) during the quarter. For more information, see Form 8849 (Schedule 3) and Form 720.

5. Biodiesel (Including Agri-biodiesel) Mixture Credit

Beginning January 1, 2005, the procedures for making a claim for most alcohol-blended fuels have been changed. Special rules determine the order in which these claims can be made. Only one claim may be made for any amount of biodiesel used to make a biodiesel fuel mixture. See How to claim the credit later.

Biodiesel mixture credit. You can take the credit for biodiesel you use to produce a qualified mixture. A qualified mixture is a mixture of biodiesel with diesel fuel without regard to kerosene.

You can take the credit only for a mixture you produce. You must sell the mixture to any person for use as a fuel, or use it as a fuel in your trade or business. Take into account biodiesel you use to produce a qualified mixture only if the sale or use is in your trade or business.

You cannot take a credit for the casual off-farm production of a qualified biodiesel mixture.

Biodiesel. Biodiesel means the monoalkyl esters of long chain fatty acids derived from plant or animal matter which meet the registration requirements for fuels and fuel additives established by the Environmental Protection Agency (EPA) under section 211 of the Clean Air Act, and the requirements of the American Society of Testing Materials D6751.

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

Certification. You must obtain and keep as part of your records a certification to you from the producer or importer of the biodiesel. The certificate is required for any biodiesel fuel credit claimed. The certificate must identify the product produced and the percentage of biodiesel and agri-biodiesel in the product. If the producer or importer of the biodiesel is also the taxpayer claiming the biodiesel credit, the certificate is required. See Model Certificate F on page 20.

Separation or failure to use as fuel. If the credit applied to biodiesel used in the production of a qualified mixture, and you later separate the biodiesel from the mixture or do not use the mixture as fuel, you must pay a tax equal to the credit. Report this tax on Form 720.

Diesel fuel tax on the biodiesel in a biodiesel fuel mixture. Persons who blend biodiesel with undyed diesel fuel to produce a biodiesel mixture outside the bulk transfer terminal system must pay the diesel fuel tax on the volume of biodiesel in the mixture. See Form 720 to report this tax. You also must be registered with the IRS as a blender. See Form 637.

How to claim the credit. Any biodiesel mixture credit must first be taken against your taxable fuel liability on Form 720. Any excess credit may be taken on Schedule C (Form 720), Form 8849, Form 4136, or Form 8864. See Notice 2005-4 for more information.

Claiming the excess credit. Instead of waiting until the end of the quarter when you file Form 720 to claim any excess biodiesel mixture credit, you may be able to file Form 8849 (Schedule 3) during the quarter. For more information, see Form 8849 (Schedule 3) and Form 720.

6. Alcohol Fuel Credit

If you sell or use alcohol (not in a mixture) as a fuel, you may be eligible for a general business credit on your income tax return. The alcohol fuel credit consists of the straight alcohol credit, the alcohol fuel mixture credit, and the small ethanol producer credit. The alcohol fuel mixture credit was discussed in Chapter 4 earlier.

Alcohol eligible for the credit includes methanol and ethanol. This includes methanol produced from methane gas formed in waste disposal sites. But it does not include any of the following.

Straight alcohol credit. You can claim the credit for any alcohol not mixed with gasoline or a special fuel other than denaturants.

You are eligible for the credit for straight alcohol only if you met one of the following requirements during the tax year.

A special fuel includes any liquid fuel, other than gasoline, suitable for use in an internal combustion engine.

Mixing or failure to use as fuel. If the credit applied to alcohol you bought and you later mix the alcohol or do not use it as a fuel, you must pay a tax equal to the credit. Report this tax on Form 720.

Amount of credit. The straight alcohol credit is based on the proof content of the alcohol. You figure the proof without considering denaturants added to the alcohol. Use Form 6478 to determine the credit for each gallon of alcohol.

If you combine alcohol eligible for the credit with alcohol that is not eligible and use the combined alcohol in a way that qualifies for the credit, you figure the credit based on the proportionate amount of eligible alcohol contained in the combined alcohol.

Volume of alcohol. When figuring the number of gallons of alcohol sold or used, include the volume of any denaturant (including gasoline) added under formulas approved by the Secretary of the Treasury. Also include the denaturant when you figure the percentage of any mixture that is alcohol. However, denaturants can be counted only up to 5% of the total volume of alcohol (including denaturants).

Small ethanol producer credit. If you are an eligible small ethanol producer, you qualify for a credit on up to 15 million gallons of your qualified ethanol fuel production for any tax year. This additional alcohol fuel credit is 10 cents for each gallon.

You are an eligible small ethanol producer if, at all times during the tax year, you have an annual productive capacity of not more than 30 million gallons of any type of alcohol.

For a partnership, trust, or S corporation, the 15- and 30-million gallon limits apply at both the entity level and the partner, beneficiary, or shareholder level.

Qualified ethanol fuel production. Your qualified ethanol fuel production is any ethanol you produce and sell during the tax year to another person for any of the following purposes.

Qualified ethanol fuel production does not include any alcohol bought by a producer who then increases the proof of the alcohol by additional distillation.

Cooperative election to allocate the small ethanol producer credit to patrons. For tax years ending after October 22, 2004, a cooperative described in section 1381(a) can elect to allocate any part of the small ethanol producer credit to patrons of the cooperative. The credit is allocated among the patrons on the basis of the quantity or value of business done with or for the patrons for the tax year. For more information, see Form 6478.

Failure to use for qualifying purposes. If the credit applied to an eligible small ethanol producer and you do not use the ethanol for a purpose listed under Qualified ethanol fuel production, you must pay a tax equal to the credit. Report this tax on Form 720.

How to claim the credit. You take the alcohol fuel credit by completing Form 6478 and attaching it to your income tax return. All individuals and corporations taking the credit use Form 6478. Partnerships (including electing large partnerships), S corporations, estates, and trusts figure the credit on Form 6478 but divide the credit among their partners, shareholders, or beneficiaries.

If you take the alcohol fuel credit, you must include the credit for the tax year in your gross income for that year.

Form 6478 is the only form on which you can claim the straight alcohol fuel credit and the small ethanol producer credit.

General business credit. You combine the alcohol fuel credit with other credits on Form 3800, General Business Credit, to figure your general business credit for the year. See the Form 3800 instructions for a list of these credits and whether you must file Form 3800.

7. Biodiesel (Including Agri-biodiesel) Fuel Credit

If you sell or use biodiesel (not in a mixture) as a fuel, you may be eligible for a general business credit on your income tax return. The biodiesel fuel credit consists of a straight biodiesel fuel credit and a biodiesel mixture credit. The biodiesel mixture credit was discussed in Chapter 5 earlier. See Chapter 5 for the definitions of biodiesel and agri-biodiesel.

Certification. You must obtain and keep as part of your records a certification to you from the producer or importer of the biodiesel. The certificate is required for any biodiesel fuel credit claimed. The certificate must identify the product produced and the percentage of biodiesel and agri-biodiesel in the product. If the producer or importer of the biodiesel is also the taxpayer claiming the biodiesel credit, the certificate is required. See Model Certificate F on page 20.

Straight biodiesel credit. You can claim the credit for any biodiesel not mixed with diesel fuel.

You are eligible for the credit for straight biodiesel only if you met one of the following requirements during the tax year.

Mixing or failure to use as fuel. If the credit applied to biodiesel you bought and you later mix the biodiesel or do not use it as a fuel, you must pay a tax equal to the credit. Report this tax on Form 720.

How to claim the credit. You take the biodiesel fuel credit by completing Form 8864 and attaching it to your income tax return. All individuals and corporations taking the credit use Form 8864. Partnerships (including electing large partnerships), S corporations, estates, and trusts figure the credit on Form 8864 but divide the credit among their partners, shareholders, or beneficiaries.

If you take the biodiesel fuel credit, you must include the credit for the tax year in your gross income for that year.

Form 8864 is the only form on which you can claim the straight biodiesel fuel credit.

General business credit. You combine the biodiesel fuel credit with other credits on Form 3800, General Business Credit, to figure your general business credit for the year. See the Form 3800 instructions for a list of these credits and whether you must file Form 3800.

8. How To Get Tax Help

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Contacting your Taxpayer Advocate. If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.

The Taxpayer Advocate independently represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.

To contact your Taxpayer Advocate:

Free tax services. To find out what services are available, get Publication 910, Guide to Free Tax Services. It contains a list of free tax publications and an index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics.

Internet. You can access the IRS website 24 hours a day, 7 days a week at http://www.irs.gov to:

For help with transmission problems, call 703-487-4608. Long-distance charges may apply.

Phone. Many services are available by phone.

Walk-in. Many products and services are available on a walk-in basis.

      National Distribution Center

CD-ROM for small businesses. IRS Publication 3207, Small Business Resource Guide, is a must for every small business owner or any taxpayer about to start a business. This handy, interactive CD contains all the business tax forms, instructions, and publications needed to successfully manage a business. In addition, the CD provides an abundance of other helpful information, such as how to prepare a business plan, finding financing for your business, and much more. The design of the CD makes finding information easy and quick and incorporates file formats and browsers that can be run on virtually any desktop or laptop computer.

It is available in April. You can get a free copy by calling 1-800-829-3676 or by visiting the website at http://www.irs.gov/smallbiz.

Photographs of missing children. The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

Appendix

This appendix contains models of the certificates and waivers discussed in this publication.

Model Certificate A

           CERTIFICATE OF BUYER FOR PRODUCTION OF A COLD WEATHER BLEND