Fuel Tax Credit

Fuel Tax Credit

Investopedia / Matthew Collins

What Is the Fuel Tax Credit?

The Credit for Federal Tax Paid on Fuels (Fuel Tax Credit) is a program that lets some businesses reduce their taxable income dollar for dollar based on specific types of fuel costs. The Fuel Tax Credit encourages the production and use of fuel from renewable sources.

This credit is generally not available to individual taxpayers, as it is limited to uses including off-highway business usage, agriculture and farming, and boats and buses.

Key Takeaways

  • The Fuel Tax Credit allows businesses to reduce their taxable income dollar for dollar based on using specific types of fuel costs.
  • This credit is only available to some individuals, as it is limited to off-highway business use and a strictly defined selection of uses.
  • The Fuel Tax Credit encourages using renewably sourced fuel.
  • Landscaping, farming, manufacturing, and construction companies, among others, can benefit from the Fuel Tax Credit.

Tax Deductions Vs. Tax Credits

Understanding the Fuel Tax Credit

The Fuel Tax Credit is for offsetting the tax that the U.S. government charges on fuels such as gasoline and diesel in specific circumstances. The Internal Revenue Service (IRS) taxes these fuels mainly to fund highway maintenance, imposing the tax when the fuel is purchased. Because it's not feasible to separate the taxable from nontaxable fuel use at the time of purchase, almost everyone pays it. However, not everyone is using fuel for taxable purposes.

It Fosters Use of Renewable Resources

Because this tax will reimburse fuel taxes dollar for dollar, some companies may see a benefit to adding fuel from renewable resources to their existing fuel formulae to take advantage of the credit. However, as technology and the auto industry continue to change and adapt, the specific types of fuel that qualify for a tax credit also will change—along with their intended uses.

The IRS lists the Fuel Tax Credit as one of the most often misused or abused tax credits; fraud that involves this credit can result in a penalty of $5,000 or more and jail time.

Who's Eligible?

The eligibility criteria for this credit include a large variety of fuel types—including the type of fuel that commercial fishermen use to run their boats and the strain of fuel that a warehouse uses to operate its forklifts, for example. School bus companies also may qualify. If you are a non-profit organization you could be eligible, even if you are using vehicles on a roadway. 

Does Your Business Qualify?

You may check the IRS website, or consult with a licensed tax professional to see if you qualify. Once they determine that they're entitled to the credit, companies and some individuals may apply for the Fuel Tax Credit by using Federal Tax Form 4136. Filers may also use this form to claim the alternative fuel credit.

Fuel Tax Credit Scam

In March 2020, a Colorado court convicted a defrauder on three counts of money laundering—sentencing him to seven years in prison, plus four years of supervised release, and ordering him to reimburse the IRS approximately $7.2 million.

Which Companies Can Benefit?

Owners of landscaping, farming, manufacturing, and construction companies purchase fuel to power the equipment needed to run their businesses, but they often overlook this credit. For example, the owner of a landscaping business who is using gasoline in its lawnmowers will have a legitimate claim to the credit, as it qualifies for the "off-highway use" category.

The Fuel Tax Credit and the IRS

An Oft-Abused Claim

Even though the Fuel Tax Credit is not available to most taxpayers, the IRS finds that many filers inflate the dollar amount of their requested refunds by erroneously claiming the credit. Improper claims for the Fuel Tax Credit may come in two forms: An individual or business can make an error on their otherwise legitimate tax return, or identity thieves can file bogus claims, often as part of a broader fraudulent scheme.

The IRS's "Dirty Dozen"

Each year, the IRS compiles its Dirty Dozen list, which represents the "worst of the worst" tax scams. The Dirty Dozen repeatedly lists the Fuel Tax Credit as one of the most often misused or abused tax credits. It is either taken in error or in a conscious attempt to cheat the government. The IRS considers Fuel Tax Credit fraud to be a "frivolous tax claim," which can result in a penalty of $5,000 or more plus jail time.

The Fuel Tax Credit in the News

On March 2, 2020, the IRS reported on its website that a Colorado court sentenced Matthew Taylor to 83 months in prison for his role in a biodiesel tax credit fraud scheme. Taylor pleaded guilty to one count each of conspiring to defraud the United States, conspiring to commit money laundering, and committing money laundering. In addition to the seven-year prison term, the judge ordered Taylor to serve four more years of supervised release and to reimburse the U.S. government approximately $7.2 million.

The court ruled that Taylor and his co-conspirators scammed the U.S. government by filing false claims for tax credits. (In this particular case, the defrauders would have used IRS Form 8864 Biodiesel and Renewable Diesel Fuels Credit to apply for the credit instead of IRS Form 4136.) The defrauders created a fake company, Shintan Inc., which professed to be in the business of creating fuel from renewable resources. To avoid exposure, the defrauders transferred the illegally obtained funds through a series of bank accounts that belonged to Shintan and other shell corporations.

From 2010 to 2013, Taylor and his accomplices applied for and received from the IRS more than $7.2 million in tax credits—of which Taylor received $4.5 million personally—for renewable fuel that Shintan allegedly produced. Of course, Shintan produced no qualifying renewable fuel, nor any fuel at all.

The IRS special investigator on the case noted that by his actions, Taylor cheated not only the government but all U.S. taxpayers.

Article Sources
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  1. Internal Revenue Service. "About Form 4136, Credit for Federal Tax Paid on Fuels." Accessed Sept. 28, 2021.

  2. Internal Revenue Service. "Instructions for Form 4136," Pages 1-2. Accessed Sept. 28, 2021.

  3. Internal Revenue Service. "Avoid Improper Claims for Business Credits; Topic Makes This Year’s IRS 'Dirty Dozen' List." Accessed Sept. 28, 2021.

  4. Internal Revenue Service. "Form 4136," Accessed Sept. 28, 2021.

  5. Internal Revenue Service. "Colorado Man Sentenced to 83 Months in Prison for Role in $7.2 Million Biodiesel Tax Credit Scheme." Accessed Sept. 28, 2021.

  6. Internal Revenue Service. "Dirty Dozen." Accessed Sept. 28, 2021.