Final purchasers, and in some cases, ultimate vendors of certain types of fuels may be able to claim a refund or credit for the federal excise tax that applies on the fuel if it is for specific nontaxable uses, such as on a farm, for off-highway business use, for commercial fishing, in certain types of intercity, local, and school buses, and for exclusive use by a non-profit educational organization.
A credit can be taken for U.S. federal Income tax purposes for certain non-taxable use of fuels. This credit can be claimed on Form 4136, Credit for Federal Tax Paid on Fuels, filed with the annual federal income tax return. Certain taxpayers may be entitled to claim a periodic refund for the federal excise tax on fuels, by filing Form 8849, Claim for Refund of Excise Taxes. A credit can also be claimed on Schedule C of Form 720, Quarterly Federal Excise Tax Return, if a liability for excise taxes is reported on that form.Types of Fuels That May Qualify for a Credit or Refund
There are different types of fuels for which the final purchaser and user may be able to claim a tax credit for non-taxable use of the fuel. These fuels include:
- Gasoline, including all products commonly and commercially sold as gasoline that have an octane rating of 75 or more and are suitable for use as a motor fuel. This also includes gasoline blends other than ethanol and methanol fuel, and denatured gasoline.
- Aviation gasoline, including all special grades of gasoline suitable for use in aviation reciprocating engines.
- Undyed diesel fuel. Diesel fuel includes any liquid that without further processing or blending is suitable for use as a fuel in a diesel-powered highway vehicle or train. Diesel fuel also includes transmix and diesel fuel blendstocks. Transmix is a by-product of refined products that are mixed while being transported by pipeline.
- Undyed kerosene. One of the two grades: No. 1-K and No. 2-K.
- Aviation-grade kerosene. Kerosene-type jet fuel.
- Liquefied petroleum gas (LPG). Propane, butane, and pentane, or mixtures of those gases.
Nontaxable Uses of Fuels that May Qualify for a Credit or Refund
Several specific types of nontaxable uses of fuels are defined in the tax regulations for claiming credits or refunds for the federal excise tax paid. These nontaxable uses correspond to the types of fuel identified above, as they are used in particular types of vehicles and for specific types of uses.
Some of the more common types of nontaxable uses of the different types of fuels include: use on a farm for farming purposes, off-highway business use, in a boat for commercial fishing, in certain intercity and local buses or school buses, and exclusive use by a non-profit educational organization. A table of these nontaxable uses and their corresponding codes can be found in Internal Revenue Service (IRS) Publication 378, Fuel Tax Credits and Refunds, and in the instructions for Form 4136, Credit for Federal Tax Paid on Fuels, and Form 8849, Claim for Refund of Excise Taxes. There are certain lines on these tax forms where the code number associated with a certain specific nontaxable use will need to be entered.
Who Can Claim a Refund or Credit?
Generally, the ultimate purchaser of the fuel can claim a refund or credit for nontaxable use of the fuel. But there are cases where certain registered ultimate vendors may be able to apply for the credit or refund if it has been waived by the ultimate purchaser. And there are certain cases in which only the registered ultimate vendor is allowed to claim a refund or credit.
Sales by Registered Ultimate Vendor
For example, in the case of undyed diesel fuel or kerosene sold for use on a farm for farming purposes, or for exclusive use by a state or local government, only the registered ultimate vendor can claim a tax refund or credit. This is also the case for undyed kerosene sold from a blocked pump, undyed kerosene sold for blending, and undyed diesel fuel or kerosene used in intercity and local buses. For other types of fuels used on a farm, or used exclusively by a state or local government, the final purchaser may be able to claim a refund or credit.
A blocked pump is a fuel pump that has a sign indicating that it is for undyed and untaxed kerosene for nontaxable use only, that is locked after each sale, and that cannot be used to dispense fuel into the tank of a diesel-powered highway vehicle or train. The registered ultimate vendor must be registered by the IRS. To register, you have to complete and file Form 637, Application for Registration (For Certain Excise Tax Activities).
A registered ultimate vendor may claim a tax refund or credit when it sells a cold weather blend, which is a blend of kerosene and diesel fuel for heating purposes in an area that the IRS has designated as an area of extreme cold.
In the case of sales of undyed diesel fuel or kerosene to intercity and local buses, the registered ultimate vendor can claim the refund or credit if the purchaser waives its right to claim it. Sample waiver forms are included in the Appendix to IRS Publication 378.
How to File Claims for Refunds and Credits
If you are an ultimate purchaser claiming a credit or refund for nontaxable use of a fuel, you should keep records of each type of nontaxable use, including the number of gallons of the fuel you purchased and used during the period for which you are filing the claim, the dates you purchased the fuel, and the names and addresses of the suppliers and the amounts you purchased from each of them. If you have more than one nontaxable use, it is important to keep track of the number of gallons of fuel used for each type of nontaxable use for which you are filing a claim.
In order for you to claim a refund or credit as the ultimate vendor, you must have sold the fuel at a tax-excluded price, must have repaid the tax to the buyer or obtained the buyer’s written consent to allow the claim, and you must have a valid certificate or waiver in your possession. You must also have a UV (ultimate vendor) registration number that you request by filing IRS Form 637.
You will also need to keep information on your sales. In general, this information includes the name, address, and taxpayer identification number of each person or entity that bought the fuel, the date of the sale, the number of gallons sold to each person, and a certificate or waiver from the buyer.
Refunds and Credits
Refunds of federal excise tax on fuels are generally claimed on Form 8849, Claim for Refund of Excise Taxes. If you have to file Form 720, Quarterly Federal Excise Tax Return, because you owe certain federal excise taxes, you can use Schedule C of that form to claim a refund for your nontaxable use of a fuel for the quarter.
If you are an ultimate purchaser of the fuel, you can only claim a refund on Form 720 for any quarter in which you can claim at least $750. This is the amount of the excise tax on fuel you used for a nontaxable use in the quarter, or in any previous quarters during the year for which you have not yet requested a refund. You can carry forward the amount from one quarter to another if you have less than $750 of excise taxes to claim.
Form 720 is a quarterly form. If you file an annual claim, you would need to use Form 4136, Credit for Federal Tax Paid on Fuels, which would be filed with your annual income tax return. The following taxes can only be claimed as a credit (not a refund) on Form 4136:
- Excise tax on gasoline or aviation gasoline used on a farm.
- Excise tax on fuels used for nontaxable purposes when the total for the year is less than $750.
- The excise tax on fuels used for nontaxable use, for which you did not claim a refund for any quarter during the year.
- Excise tax on fuel used in machinery for off-highway business use that traveled less than 7,500 miles.
How you claim the credit depends on whether you are filing as an individual, a partnership, a corporation, S-corporation, or a farmers’ cooperative association.
- If you are an individual, you include the amount of the credit on the “Other payments” line in the “Payments” section of Form 1040 and check the Form 4136 box.
- A partnership would pass the credit through to its partners by attaching a statement to Schedule K-1 (Form 1065), showing each partner’s share of the number of gallons of fuel involved in the nontaxable use, the type of use, and the applicable credit per gallon. The partners would then claim their applicable portions of the credit on their individual income tax returns.
- Corporations, S-corporations, and farmers’ cooperative associations claim the credit on the line “credit for Federal tax paid on fuels” on their applicable tax returns.
Including a Credit or Refund in Income
If you claim a credit or refund for the excise tax on fuel that you used for a nontaxable use, and you also deducted the total cost of the fuel as an expense on your tax return, you should include the excise tax in your gross income. By doing this, you are effectively deducting as an expense the net amount of the fuel cost, (total cost less excise tax) and taking the credit for the excise tax. The credit will directly reduce your taxes, dollar for dollar, and the deduction for the net cost of the fuel will reduce your tax by your effective tax rate times the net cost of the fuel.