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IRS clarifies timing of income tax effects of retroactive extension of fuel tax credits

Notice 2015-56, 2015-35 IRB

In a Notice, IRS has provided that the required income tax addback for the credits for biodiesel fuel blenders and for certain sales or uses of alternative fuels, that were earned as a result of the retroactive extension of those credits by the Tax Increase Prevention Act of 2014 (the Act), is done on a quarterly basis.

Background. Code Sec. 6426(a) and Code Sec. 6426(c) allow a blender of a biodiesel (including renewable diesel) mixture to claim a $1.00-per-gallon credit against its tax liability under Code Sec. 4081 (relating to the tax imposed on taxable fuel). Similarly, Code Sec. 6426(a) and Code Sec. 6426(e) allow a blender of an alternative fuel mixture to claim a credit against its tax liability under Code Sec. 4081, except that the credit amount is $0.50 per gallon. Code Sec. 6426(a) and Code Sec. 6426(d) allow a person that sells or uses alternative fuel as a fuel in a motor vehicle or motorboat and in aviation to claim a $0.50-per-gallon credit against the claimant’s tax liability under Code Sec. 4041 (relating to the tax imposed on diesel fuel and alternative fuel).

Blenders of biodiesel (including renewable diesel) mixtures and persons that sell or use alternative fuel as a fuel in a motor vehicle or motorboat and in aviation may claim any excess credit under Code Sec. 6426(c) or Code Sec. 6426(d) as a payment under Code Sec. 6427(e) or as a refundable income tax credit under Code Sec. 34. As an alternative to the payments and credits allowed under Code Sec. 6426, Code Sec. 34, and Code Sec. 6427(e), a blender of a biodiesel (including renewable diesel) mixture may claim a nonrefundable income tax credit under Code Sec. 40A.

The Code provisions that authorize these credits and payments expired for sales and uses after Dec. 31, 2013 (Sept. 30, 2014, in the case of any sale or use involving liquefied hydrogen), but were reinstated by the Act for sales and uses during 2014.

Section 160(e) of the Act required IRS to issue guidance providing for a one-time submission of claims under Code Sec. 6426(c) and Code Sec. 6426(d) (including any payment under Code Sec. 6427(e)) covering periods during 2014.

Pursuant to this statutory mandate, IRS issued Notice 2015-3, 2015-6 IRB 583 (Weekly Alert ¶  30  01/22/2015), which provides procedures to make a one-time claim for payment of the credits and payments allowable under Code Sec. 6426(c), Code Sec. 6426(a) and Code Sec. 6427(e) for biodiesel (including renewable diesel) mixtures and alternative fuels sold or used during calendar year 2014 (biodiesel and alternative fuel incentives). These procedures require that claimants submit all claims for 2014 biodiesel and alternative fuel incentives on a single Form 8849, Claim for Refund of Excise taxes.

To the extent that these credits serve to reduce the claimant’s fuel tax liability, the credits produce an income tax addback, i.e., they reduce the excise tax deduction that the claimant may claim as part of its costs of goods sold or other relevant income tax deduction. (Chief Counsel Advice 201406001)

Income tax addback must be done on quarterly basis. Notice 2015-56 provides that, for federal income tax purposes, a person making a claim pursuant to Notice 2015-3 must reduce: (i) its Code Sec. 4081 excise tax liability for each calendar quarter during the 2014 calendar year by its biodiesel mixture credit attributable to a biodiesel mixture sold or used during that calendar quarter; and (ii) its Code Sec. 4041 excise tax liability for each calendar quarter during the 2014 calendar year by its alternative fuel credit attributable to alternative fuels sold or used during the calendar quarter.

IRS noted that the Act retroactively reinstated, through Dec. 31, 2014, the biodiesel mixture credit and the alternative fuel credit. As a result, these credits are treated as if they never expired. Claimants determine their 2014 calendar year biodiesel mixture credit and alternative fuel credit by reference to the sale or use of a biodiesel mixture or alternative fuel during 2014. The Act’s procedural mandate of a one-time submission of claims process does not affect the substantive federal income tax treatment of these credits. And, these reductions apply whether or not the claimant’s tax year ended before the Act was signed into law on Dec. 19, 2014.

References: For credits and payments allowable for biodiesel mixtures, alternative fuels, and alternative fuel mixtures, see FTC 2d/FIN ¶  W-1500  et seq.; FTC 2d/FIN ¶  W-1700  et seq.; United States Tax Reporter Excise ¶  64,264  et seq.; United States Tax Reporter Excise ¶  64,274  et seq.

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