IRS clarifies direction on biodiesel tax incentive

By | October 01, 2005
In a move that is expected to increase biodiesel sales, the Internal Revenue Service (IRS) has issued a modified guidance document for the biodiesel federal excise tax credit. Biodiesel industry experts say it clarifies several unanswered questions that will allow the incentive to be used to the fullest extent possible, a positive step forward in its implementation.

The excise tax credit amounts to one cent per percentage point of biodiesel blended with petroleum diesel for "agri-biodiesel," such as that made from soybean oil, and a half-cent per percentage point for biodiesel made from recycled cooking oil. It is taken at the blender lever with the intended effect of lowering the cost of biodiesel to consumers in taxable and tax exempt markets.

Although this document is not the final rulemaking, it amends the initial guidance document (IRS Notice 2005-4) published in December 2004, by clarifying several specific issues. Those include, among other things:
-Clarification of what constitutes a "biodiesel mixture" (one gallon of diesel fuel blended into 99.9 gallons of biodiesel, or "B99.9")
-Clarification that a biodiesel mixture includes both dyed and un-dyed fuel. This means the incentive will apply in the heating oil market as
well as the off-road market
-Clarification of the biodiesel certification process for sales of biodiesel through a reseller. This creates a mechanism so that the tax incentive claimant may obtain the required biodiesel certificate directly from the biodiesel producer or indirectly from a biodiesel reseller
-Provisions for commingling of biodiesel and agri-biodiesel
-Clarification on eligible feedstocks for agri-biodiesel (palm and fish oil will qualify for agri-biodiesel incentive)
-Clarifications on applicable forms to claim credit and credit calculation

The petroleum industry has reacted favorably to the new guidance. "We appreciate IRS responding to our concerns," said Holly Tuminello, Petroleum Marketers Association of America vice president. "These changes will make the entire program flow smoothly and create an incentive for more companies to consider handling biodiesel."

The tax incentive, established originally as part of the American JOBS Creation Act of 2004, would have expired in 2006. It will now be extended through 2008 as a result of the energy bill's passage July 29. The President signed the bill into law Aug. 8.
To view the IRS guidance, visit
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