Black Liquor Tax Credit

What Was the Black Liquor Tax Credit?

The so-called black liquor tax credit was a tax loophole in the Alternative Fuel Mixture Credit (AFMC) that was exploited by some companies in the forest-products industry beginning in 2005.

The federal tax credit was intended to encourage companies to use biofuels by rewarding them for mixing them in with fossil fuels. The loophole allowed paper companies, who were already using the biofuel known as black liquor, to do the reverse of what the bill intended—add diesel to their black liquor to qualify for billions of dollars in tax credits. The credit was extended at least through the end of 2020 but a change in the law's language closed the loophole.

Black liquor is a biomass by-product of wood pulp production.

Key Takeaways

  • The Alternative Fuel Mixture Credit was intended to encourage companies to use biofuels by mixing them with fossil fuels.
  • Spotting a loophole, some paper and timber companies mixed a by-product called black liquor with diesel in order to qualify for billions of dollars in credits.
  • A revision to the law changed the terms of eligibility for the credit in 2020.

Understanding the Black Liquor Tax Credit

The Alternative Fuel Mixture Credit was designed to encourage companies to produce and use more biofuels. It gave companies a credit for producing fuel that was a mixture of gasoline and alternative sources such as biodiesel for its own use or for sale.

Companies were given 50 cents credit per gallon for every gallon of alternative fuel they used.

Whether intentionally or not, the AFMC allowed the tax credit to be claimed by companies that were already using biofuel, that by-product of wood pulp production, but could add in some conventional fuel to be eligible for the credit.

Another side-effect of the AFMC was to distort the global paper market by making U.S. paper products cheaper. This caused Canadian lawmakers to create a similar subsidy in order to remain competitive with American companies.

The Energy Policy Act

U.S. President George W. Bush signed the Energy Policy Act in August 2005, and it was extended in 2007. The act addressed a wide range of issues surrounding national energy production, including efficiency, renewable energy sources, oil and gas, and coal production.

The law provided loan guarantees for companies that use or develop technology that avoids greenhouse gas by-products. It also increased the prescribed amount of biofuel required to be mixed with gasoline in the country.

Companies that mixed traditional and biodiesel fuels qualified for the AFMC under the energy bill.

Paper and timber companies discovered the loophole in the bill that allowed them to qualify for the tax credit by mixing small amounts of diesel with black liquor. Black liquor is the biomass by-product of wood pulp production, which is commonly used to power plants and mills. The mixture, which the industry called an alternative fuel source, qualified under the rules of the credit, although in practice, it was the exact opposite process the credit was intended to promote.

The End of the Black Liquor Tax Credit

Under a series of extensions of the law, the AFMC continued to be a part of the U.S. Tax Code through the passage of the Further Consolidated Appropriations Act of 2020. The tax credit remained but the Act modified the definition of eligible fuels. That ultimately excluded any gasses created from biomasses.

Companies that filed on or before Jan. 8, 2018, would no longer qualify for the credit.

The IRS outlined rules for companies to make one-time claims for credits for the 2018 and 2019 tax years under Notice 2020-8.

Special Considerations

The intention of Congress in creating the Alternative Fuel Mixture Credit and the tax credit that preceded it, the alcohol motor fuel tax credit, was to create incentives for the industry to create liquid motor fuels out of biomass. Since wood pulp processing always left biomass, turning it into usable liquid fuel would be economically and environmentally useful, and the alcohol motor fuel tax credit was intended to accelerate research and conversion to biomass fuels. In June of 2009, black liquor became eligible for the refundable AFMC. But as mentioned above, it was excluded from the list of eligible fuels.

Article Sources
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  1. The New York Times. "Tax Loopholes Block Efforts to Close Gaping U.S. Deficit." Accessed Jan. 19, 2021.

  2. Legal Information Institute. "Credit for alcohol fuel, biodiesel, and alternative fuel mixtures." Accessed Feb. 17, 2021.

  3. The Tax Adviser. "IRS Offers Guidance on Accounting for Black Liquor Credit Repayments." Accessed Jan. 19, 2021.

  4. United States Environmental Protection Agency. "Summary of the Energy Policy Act." Accessed Jan. 19, 2021.

  5. Forest2Market. "Black Liquor Tax Credits." Accessed Jan. 19, 2021.

  6. Ernst & Young. "Congress approves extenders packages, which includes excise tax provisions affecting federal taxes on fuel, alcohol and manufacturers." Accessed Jan. 19, 2021.

  7. Katz, Sapper & Miller. "Retroactive Fuel Credit Extensions May Result in Refunds." Accessed Jan. 19, 2021.

  8. Internal Revenue Service. "Biodiesel and Alternative Fuels; Claims for 2018-2019." Accessed Jan. 19, 2021.

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