Alternative Fuels Tax Credit

What Is the Alternative Fuels Tax Credit?

The alternative fuels credit is a non-refundable tax credit awarded to taxpayers who use non-alcohol alternative fuels that are either sold commercially by the taxpayer or used in the taxpayer's vehicles for business.

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Tax Deductions Vs. Tax Credits

Understanding the Alternative Fuels Tax Credit

The alternative fuels credit, which is detailed in the Internal Revenue Code (IRC), originated from the idea that the U.S. should reduce its dependence on imported oil and embrace advanced fuels and vehicle technologies.

Particularly influential in the development of the IRC’s views on alternative fuels were the American Jobs Creation Act of 2004 (Jobs Bill), the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users (Highway Bill), and the Energy Policy Act of 2005 (EPAct 2005). The fuel credits for biodiesel or renewable diesel credits, as well as fuel mixtures, including ethanol/gasoline blends, were established in the Volumetric Excise Tax Credit (VEETC) portion of the Jobs Bill. They are meant to provide incentives to produce, sell, and use these fuels.

The Internal Revenue Service considers alternative fuels to be liquefied petroleum gas (LPG), compressed natural gas (CNG), liquefied natural gas (LNG), liquefied hydrogen, liquid fuel derived from coal (including peat) through the Fischer-Tropsch process, liquid hydrocarbons derived from biomass, and P-Series fuels. Note that hydrocarbons include liquids that contain oxygen, hydrogen, and carbon, and that liquid hydrocarbons derived from biomass include ethanol, biodiesel, and renewable diesel.

However, the IRS does not include these fuels in the alternative fuels category. Tax incentives for these fuels are covered under the fuel categories of gasoline and diesel, respectively.

This credit is set to expire on December 31, 2020 unless Congress extends the credit.

A $0.50 per gallon credit is available for natural gas, liquefied hydrogen, propane, P-Series fuel, liquid fuel derived from coal through the Fischer-Tropsch process, and compressed or liquefied gas derived from biomass. For propane and natural gas sold, the tax credit is based on the gasoline gallon equivalent (GGE) or diesel gallon equivalent (DGE).

Alternative Fuels Credit Availability

Among those that may be able to take advantage of the alternative fuels credit are fleet operators, fuel providers, and fuel blenders. To qualify for the tax credit, fuel composition, the way the fuel is used, and the excise tax payment procedure must be clearly delineated. Providers and blenders must also register with the Internal Revenue Service. Forms 8849, 4136, 6478, or 8864 can be used to make a claim or a refund for alcohol, biodiesel or renewable diesel, or alternative fuel used to produce a mixture. 

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  1. Internal Revenue Service. "Form 4136: Credit for Federal Tax Paid on Fuels," Page 3. Accessed Feb. 20, 2020.

  2. Internal Revenue Service. "Biodiesel and Alternative Fuels; Claims for 2018-2019," Pages 1-3. Accessed Feb. 20, 2020.

  3. Internal Revenue Service. "Biodiesel and Alternative Fuels; Claims for 2018-2019," Page 1-9. Accessed Feb. 20, 2020.

  4. Congressional Research Service. "Energy Tax Policy: History and Current Issues," Pages 1, 5. Accessed Feb. 20, 2020.

  5. U.S. Department of Energy. "Fact Sheet: Federal Tax Incentives Encourage Alternative Fuel Use," Pages 1-4. Accessed Feb. 20, 2020.

  6. Internal Revenue Service. "Part III - Administrative, Procedural, and Miscellaneous (Alternative fuel; definition of liquid hydrocarbon)," Pages 1-3. Accessed Feb. 20, 2020. 

  7. https://www.irs.gov/pub/irs-dft/i4136--dft.pdf pg 2

    https://afdc.energy.gov/laws/319

  8. Internal Revenue Service. "Instructions for Form 4136 (2019)," Pages 1-2. Accessed Feb. 20, 2020.

  9. U.S. Department of Energy. "Alternative Fuel Excise Tax Credit." Accessed Feb. 20, 2020.

  10. U.S. Department of Energy. "Fact Sheet: Federal Tax Incentives Encourage Alternative Fuel Use," Page 2. Accessed Feb. 20, 2020.