Biodiesel blenders who claim excise tax credits for mixing biodiesel into diesel fuel can only deduct the net excise taxes they pay on the blended fuel after the credits, the IRS said.

The IRS made the statement in an internal legal memo it sent the IRS field in Houston in late January. The memo is Chief Counsel Advice 201406001.

The IRS compared this to the situation where someone claims a state income tax credit. “For example, in the analogous situation where a state provides a credit against state income tax liability, the Service has ruled that the state tax credit is not includible in gross income but rather reduces the taxpayer’s state income tax deduction for federal income tax purposes.”

The IRS branch chief who signed the memo said some people argue that the tax credit was meant as a subsidy and should be viewed as separate from the excise taxes the blender is paying. The IRS does not share that view.

The US government encourages biodiesel to be mixed into diesel fuel to produce a blend for use in trucks. Refineries and distributors doing the blending have a choice of claiming an income tax credit of 50¢ a gallon of biodiesel used ($1 for “renewable biodiesel” from agricultural sources) or alternatively of claiming a tax credit of $1 per gallon of biodiesel against the federal excise taxes on the blended fuel. The excise taxes are 24.3¢ a gallon.

Any excess excise tax credits are refundable. The latest IRS memo supplements an earlier memo the IRS national office wrote last October (Chief Counsel Advice 201342010) that said biodiesel blenders do not have to report refunds of excess excise tax credits as income.

by Keith Martin