Anaerobic digester owners have been claiming refundable federal tax credits of 50¢ a gallon on methane made from hog and cattle manure and crop residue. The methane is used to generate electricity.
The IRS national office said in an internal memo that the agency made public in late August that the tax credits are not allowed. The memo is Chief Counsel Advice 201133010.
A tax credit of 50¢ can be claimed on each gallon of “alternative fuel mixture” that a company produces, provided the mixture is then sold to someone else for use as fuel or used directly as fuel by the company doing the mixing.
Manure and crop residue qualify as alternative fuels. Some companies mix a small amount of diesel fuel in with the manure or crop residue before it is fed through the biodigester and claim they have made an alternative fuel mixture. Others use atomizers to spray diesel fuel in the methane produced by the biodigester as the methane moves toward the generator where it is converted into electricity or else they add diesel fuel directly to the generator simultaneously with the methane.
The IRS said that in the first case where the diesel fuel is mixed with manure or crop residue before it is fed into the biodigester, the mixture is not being used a fuel. It said that in the second case where diesel fuel is sprayed into the fuel stream feeding the generator, no single alternative fuel mixture is produced. Two separate fuels —methane and diesel fuel — are consumed at the same time in the generator.
The alternative fuel mixture credit is a credit against federal excise taxes collected on gasoline, diesel and other fuels at the pump. However, the credit is refundable in cash or can be converted into an income tax credit if the taxpayer does not pay enough in excise taxes to absorb the full credit. The alternative fuel mixture credit is found in section 6426(e)(1) of the US tax code. It will expire at the end of December unless extended by Congress.