Renewable Energy Memo

Producers of alternative fuels (non-biodiesel fuels that qualify for a $0.50 per gallon credit under Sections 6426(d) and 6427(e) of the Internal Revenue Code) should be aware of how the Biodiesel Tax Incentive Reform and Extension Act of 2009 will affect their access to tax credits.  Importantly, that recently-introduced bill will have no affect on alternative fuel credits and will not extend the existing alternative fuel credit program that is set to expire at the end of this year.

Biodiesel currently qualifies for a $1 per gallon income tax credit under Section 40A(a)(1) and (2) of the Internal Revenue Code for neat biodiesel and biodiesel fuel mixtures.  That provision defines biodiesel as fuel from plant or animal matter that meets the requirements of Section 211 of the Clean Air Act and the requirements of ASTM Standard D6751.  Qualifying biodiesel must be either used as a fuel in the producer’s business or sold at retail by the producer into a motor vehicle tank.  The Section 40A credits are included in taxable income under Section 87 of the Internal Revenue Code.

Because of the retail sale requirements of Section 40A(a)(2), many biodiesel producers claim instead a refundable biodiesel mixture excise tax credit of $1 per gallon for mixing their fuel with a taxable (fossil) fuel.  This credit (sometimes called the biodiesel ‘blender’s’ credit) is encapsulated in Sections 6426(c) and 6427(e)(1) of the Internal Revenue Code.  Biodiesel must meet the same Section 40A definitional requirements to qualify for the excise tax mixture credit, including the Clean Air Act and ASTM standards.

The biodiesel mixing credit requires that the producer obtain a certification (See IRC Section 6426(c)).     The credit applies whether the biodiesel mixer sells the mixture or burns the mixture in its own operations (See IRC Section 6427(e)(1) )  The biodiesel income and excise tax credits are set to expire on December 31, 2009.

Producers of “alternative fuels”, including liquid biomass fuel that does not meet the definition of biodiesel have been able to obtain a $0.50 per gallon tax credit under IRC Section 6426(d) (for alternative fuels sold or consumed by the producer as a fuel in a motor vehicle or motorboat) or under IRC Section 6426(e)(1) (for alternative fuels that are mixed with a taxable fuel like diesel or gasoline).

S.B. 1589, as currently drafted, would not amend Sections 6426(d) or (e), leaving them unchanged with respect to non-biodiesel ‘alternative’ fuels and the applicable $0.50 per gallon credit.  The alternative fuel credits are, however, slated to expire on December 31, 2009 so producers of those fuels will need to contact their Congressional representatives if they hope to see an extension of those credit programs.